Business and Financial Disclosure Required by Regulation S-K, 23915-24008 [2016-09056]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 78 (Friday, April 22, 2016)]
[Proposed Rules]
[Pages 23915-24008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09056]



[[Page 23915]]

Vol. 81

Friday,

No. 78

April 22, 2016

Part III





Securities and Exchange Commission





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17 CFR Parts 210, 229, 230, et al.





 Business and Financial Disclosure Required by Regulation S-K; Concept 
Release; Proposed Rule

Federal Register / Vol. 81 , No. 78 / Friday, April 22, 2016 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 232, 239, 240 and 249

[Release No. 33-10064; 34-77599; File No. S7-06-16]
RIN 3235-AL78


Business and Financial Disclosure Required by Regulation S-K

AGENCY: Securities and Exchange Commission.

ACTION: Concept release.

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SUMMARY: The Commission is publishing this concept release to seek 
public comment on modernizing certain business and financial disclosure 
requirements in Regulation S-K. These disclosure requirements serve as 
the foundation for the business and financial disclosure in 
registrants' periodic reports. This concept release is part of an 
initiative by the Division of Corporation Finance to review the 
disclosure requirements applicable to registrants to consider ways to 
improve the requirements for the benefit of investors and registrants.

DATES: Comments should be received on or before July 21, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/concept.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-06-16 on the subject line; or
     Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-16. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's Web site (https://www.sec.gov/rules/concept.shtml). Comments also are available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Angie Kim, Special Counsel in the 
Office of Rulemaking, at (202) 551-3430, in the Division of Corporation 
Finance; 100 F Street NE., Washington, DC 20549.

Table of Contents

I. Introduction
II. Relevant History and Background
    A. History of Regulation S-K
    B. Broad Economic Considerations
    C. Prior Regulation S-K Modernization Initiatives and Studies
III. Disclosure Framework
    A. Basis for Our Disclosure Requirements
    1. Statutory Mandates
    2. Commission Responses to Market Developments
    B. Nature of Our Disclosure Requirements
    1. Principles-Based and Prescriptive Disclosure Requirements
    2. Audience for Disclosure
    3. Compliance and Competitive Costs
IV. Information for Investment and Voting Decisions
    A. Core Company Business Information
    1. General Development of Business (Item 101(a)(1))
    2. Narrative Description of Business (Item 101(c))
    3. Technology and Intellectual Property Rights (Item 
101(c)(1)(iv))
    4. Government Contracts and Regulation, Including Environmental 
Laws (Items 101(c)(1)(ix) and (c)(1)(xii))
    5. Number of Employees (Item 101(c)(1)(xiii))
    6. Description of Property (Item 102)
    B. Company Performance, Financial Information and Future 
Prospects
    1. Selected Financial Data (Item 301)
    2. Supplementary Financial Information (Item 302)
    3. Content and Focus of MD&A (Item 303--Generally)
    4. Results of Operations (Item 303(a)(3))
    5. Liquidity and Capital Resources (Item 303(a)(1) and (a)(2))
    6. Off-Balance Sheet Arrangements (Item 303(a)(4))
    7. Contractual Obligations (Item 303(a)(5))
    8. Critical Accounting Estimates
    C. Risk and Risk Management
    1. Risk Factors (Item 503(c))
    2. Quantitative and Qualitative Disclosures About Market Risk 
(Item 305)
    3. Disclosure of Approach to Risk Management and Risk Management 
Process
    4. Consolidating Risk-Related Disclosure
    D. Securities of the Registrant
    1. Related Stockholder Matters--Number of Equity Holders (Item 
201(b))
    2. Description of Capital Stock (Item 202)
    3. Recent Sales of Unregistered Securities (Items 701(a)-(e))
    4. Use of Proceeds From Registered Securities (Item 701(f))
    5. Purchases of Equity Securities by the Issuer and Affiliated 
Purchasers (Item 703)
    E. Industry Guides
    1. Comments Received
    2. Discussion
    3. Request for Comment
    F. Disclosure of Information Relating to Public Policy and 
Sustainability Matters
    1. Comments Received
    2. Discussion
    3. Request for Comment
    G. Exhibits
    1. Request for Comment
    2. Schedules and Attachments to Exhibits
    3. Amendments to Exhibits
    4. Changes to Exhibits (Instruction 1 to Item 601)
    5. Material Contracts (Item 601(b)(10))
    6. Preferability Letter (Item 601(b)(18))
    7. Subsidiaries and Legal Entity Identifiers
    H. Scaled Requirements
    1. Categories of Registrants Eligible for Scaled Disclosure
    2. Scaled Disclosure Requirements for Eligible Registrants
    3. Frequency of Interim Reporting
V. Presentation and Delivery of Important Information
    A. Cross-Referencing
    1. Comments Received
    2. Discussion
    B. Incorporation by Reference
    1. Comments Received
    2. Discussion
    3. Request for Comment
    C. Hyperlinks
    1. Comments Received
    2. Discussion
    3. Request for Comment
    D. Company Web Sites
    1. Comments Received
    2. Discussion
    3. Request for Comment
    E. Specific Formatting Requirements
    1. Comments Received
    2. Discussion
    3. Request for Comment
    F. Layered Disclosure
    1. Comments Received
    2. Discussion
    3. Request for Comment
    G. Structured Disclosures
    1. Comments Received
    2. Discussion
    3. Request for Comment
VI. Conclusion

I. Introduction

    Regulation S-K was adopted to foster uniform and integrated 
disclosure for registration statements under the Securities Act of 1933 
(``Securities Act''), registration statements under the Securities 
Exchange Act of 1934 (``Exchange Act''), and other Exchange Act 
filings, including periodic and current reports.\1\ Over thirty years 
ago, the Commission expanded and reorganized Regulation S-K to be the

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central repository for its non-financial statement disclosure 
requirements.\2\ When adopting the integrated disclosure system, the 
Commission's goals were to reduce the costs to registrants and 
eliminate duplicative disclosures while continuing to provide material 
information.\3\ In this concept release, we revisit the business and 
financial disclosure requirements in Regulation S-K. We seek to assess 
whether they continue to provide the information that investors need to 
make informed investment and voting decisions and whether any of our 
rules have become outdated or unnecessary.
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    \1\ See Item 10(a) of Regulation S-K [17 CFR 229.10].
    \2\ See Adoption of Integrated Disclosure System, Release No. 
33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (``1982 
Integrated Disclosure Adopting Release'').
    \3\ See id.
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    We focus this release on business and financial disclosures that 
registrants provide in their periodic reports, which are a subset of 
the disclosure requirements in Regulation S-K.\4\ We focus on these 
requirements because many of them have changed little since they were 
first adopted. We are not at this time revisiting other disclosure 
requirements in Regulation S-K, such as executive compensation and 
governance, or the required disclosures for foreign private issuers, 
business development companies, or other categories of registrants. 
Although the specific scope of this concept release is as indicated, we 
welcome and encourage comments on any other disclosure topics not 
specifically addressed in this concept release.
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    \4\ The scope of this release does not include certain 
disclosure requirements for information other than business and 
financial disclosures, such as Subpart 400, which requires 
disclosure about management and certain security holders as well as 
corporate governance matters. We also have not included offering-
specific disclosure requirements under Subpart 500, which generally 
apply to registration statements and prospectuses but not periodic 
reports.
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    This release begins with a discussion of the regulatory history of 
the integrated disclosure system and Regulation S-K as well as an 
overview of prior initiatives to review and modernize our disclosure 
requirements. We then present the framework for our current disclosure 
regime and explore potential alternative approaches. We proceed to 
review the business and financial disclosure requirements that apply to 
periodic reports. We first consider what financial and business 
information should be required and whether any of these requirements 
are appropriate to scale for smaller registrants. We then explore how 
registrants can most effectively present this information to improve 
its usefulness to investors. In this release, we consider input we have 
received from letters submitted in response to disclosure modernization 
efforts \5\ as well as the staff's experience with particular 
disclosure requirements, regulatory history and changes in the 
regulatory and business landscape since the rule's adoption.
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    \5\ See infra notes 9 to 10 and accompanying text.
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    Through this release, we are reviewing and seeking public comment 
on whether our business and financial disclosure requirements continue 
to elicit important information for investors and how registrants can 
most effectively present this information. We are specifically seeking 
comment on:
     Whether, and if so, how specific disclosures are important 
or useful to making investment and voting decisions and whether more, 
less or different information might be needed;
     whether, and if so how, we could revise our current 
requirements to enhance the information provided to investors while 
considering whether the action will promote efficiency, competition, 
and capital formation; \6\
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    \6\ Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] requires 
that, whenever the Commission is engaged in rulemaking under the 
Exchange Act and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition 
and capital formation. Section 2(b) of the Securities Act [15 U.S.C. 
77b(b)] sets forth this same requirement. See also Section 23(a)(2) 
of the Exchange Act [15 U.S.C. 78w(a)(2)].
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     whether, and if so how, we could revise our requirements 
to enhance the protection of investors;
     whether our current requirements appropriately balance the 
costs of disclosure with the benefits;
     whether, and if so how, we could lower the cost to 
registrants of providing information to investors, including 
considerations such as advancements in technology and communications;
     whether and if so, how we could increase the benefits to 
investors and facilitate investor access to disclosure by modernizing 
the methods used to present, aggregate and disseminate disclosure; and
     any challenges of our current disclosure requirements and 
those that may result from possible regulatory responses explored in 
this release or suggested by commenters.

While we set forth a number of general and specific questions, we 
welcome comments from investors, registrants and other market 
participants on any other concerns related to our disclosure 
requirements. In addition to comments received on this release, we will 
consider any input from investor focus group studies or surveys, the 
Investor Advisory Committee and the Advisory Committee on Small and 
Emerging Companies.

    This concept release is part of a comprehensive evaluation of the 
Commission's disclosure requirements recommended in the staff's Report 
on Review of Disclosure Requirements in Regulation S-K (``S-K Study''), 
which was mandated by Section 108 of the Jumpstart Our Business 
Startups Act (``JOBS Act'').\7\ Based on the S-K Study's recommendation 
and at the request of Commission Chair Mary Jo White,\8\ Commission 
staff initiated a comprehensive evaluation of the type of information 
our rules require registrants to disclose, how this information is 
presented, where and how this information is disclosed and how we can 
leverage technology as part of these efforts (collectively, 
``Disclosure Effectiveness Initiative''). The overall objective of the 
Disclosure Effectiveness Initiative is to improve our disclosure regime 
for both investors and registrants.
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    \7\ Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). Section 
108 of the JOBS Act required the Commission to conduct a review of 
Regulation S-K to determine how such requirements can be updated to 
modernize and simplify the registration process for emerging growth 
companies (``EGCs''). For a further discussion of the S-K Study, see 
Section II.C.
    \8\ See SEC Issues Staff Report on Public Company Disclosure 
(Dec. 20, 2013), available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540530982.
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    In connection with the S-K Study \9\ and the subsequent launch of 
the Disclosure Effectiveness Initiative,\10\ we received public 
comments on various topics discussed in this release. Below and 
elsewhere throughout this release, we discuss these comments as further 
context for the topics under consideration. Comments received in 
connection with the Disclosure Effectiveness Initiative that are 
outside the scope of this release are not discussed here. These comment 
letters are being considered as part of the staff's continued 
evaluation of Regulation S-K

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from which the staff expects to make further recommendations to the 
Commission for consideration.
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    \9\ In connection with the S-K Study, we received public 
comments on regulatory initiatives to be undertaken in response to 
the JOBS Act. See Comments on SEC Regulatory Initiatives Under the 
JOBS Act: Title I--Review of Regulation S-K, available at https://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml.
     Some of the comments received in connection with the S-K Study 
were specific to EGCs.
    \10\ To facilitate public input on the Disclosure Effectiveness 
Initiative, members of the public were invited to submit comments. 
Public comments we have received to date on the topic of Disclosure 
Effectiveness are available on our Web site. See Comments on 
Disclosure Effectiveness, available at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
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    The staff is also working on recommendations for our consideration 
to propose specific revisions to update or simplify certain of our 
business and financial disclosure requirements, as required by the 
recently enacted Fixing America's Surface Transportation Act of 2015 
(``FAST Act'').\11\ Those recommendations relate to specific proposals 
to help address ``duplicative, overlapping, outdated or unnecessary'' 
disclosure and are not specifically addressed in this concept release, 
which seeks to explore both general considerations and specific 
questions that we believe would benefit from further evaluation and 
input before proposing any changes to the related rules.\12\
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    \11\ Public Law 114-94, Sec. 72002, 129 Stat. 1312 (2015).
    \12\ Id.
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II. Relevant History and Background

A. History of Regulation S-K

Regulation S-K
    Enactment of the Securities Act and the Exchange Act resulted in 
the creation of two separate disclosure regimes. These disclosure 
regimes remained distinct for approximately thirty years and often 
resulted in overlapping and duplicative disclosure requirements. 
Regulation S-K reflects the Commission's efforts to harmonize 
disclosure required under both the Securities Act and the Exchange Act 
by creating a single repository for disclosure regulation that applies 
to filings by registrants under both statutes.
    The current integrated disclosure system resulted from a series of 
efforts triggered by a 1964 amendment to the Exchange Act,\13\ which 
added Section 12(g) to the Exchange Act and extended the Exchange Act's 
reporting requirements to companies meeting specified thresholds, 
including those that were not exchange listed.\14\ In light of the 
Exchange Act's broadened reporting requirements, Professor Milton Cohen 
suggested in a seminal 1966 law review article greater coordination 
between the Securities Act and Exchange Act.\15\ He recommended that 
the continuous reporting obligations under the Exchange Act serve as 
the foundation for corporate disclosure while relaxing or eliminating 
overlapping Securities Act disclosure requirements.\16\
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    \13\ See, e.g., Disclosure to Investors--A Reappraisal of 
Federal Administrative Policies under the '33 and '34 Acts, Policy 
Study, Mar. 27, 1969, available at https://www.sechistorical.org/museum/galleries/tbi/gogo_d.php (``Wheat Report'') (stating that one 
of the reasons for a broad re-examination of disclosure policy was 
the 1964 amendment to the Exchange Act). See also infra note 15.
    \14\ 15 U.S.C. 781(g). Congress enacted Section 12(g) of the 
Exchange Act in 1964, which required an issuer to register a class 
of securities under Section 12(g) if the securities were ``held of 
record'' by 500 or more persons and the issuer had total assets 
exceeding $1 million. Prior to the enactment of Section 12(g), the 
Exchange Act reporting requirements were applicable only to listed 
companies. The Commission used its authority under Section 12(h) to 
raise the asset threshold for Section 12(g) registration from $1 
million to $3 million in 1982, $5 million in 1986 and $10 million in 
1996.
    As a result of amendments made by the JOBS Act and the FAST Act, 
Section 12(g)(1) of the Exchange Act now requires an issuer that is 
not a bank, bank holding company, or savings and loan holding 
company to register a class of equity securities if the securities 
are held of record by either (i) 2,000 persons, or (ii) 500 persons 
who are not accredited investors and the issuer has total assets 
exceeding $10 million. Banks, bank holding companies and savings and 
loan holding companies with total assets exceeding $10 million must 
register a class of equity securities if the securities are held of 
record by 2,000 or more persons. Public Law 112-106, Sec. 501, 126 
Stat. 306 (2012) and Public Law 114-94, Sec. 85001, 129 Stat. 1312 
(2015).
    \15\ See Milton H. Cohen, ``Truth in Securities'' Revisited, 79 
Harv. L. Rev. 1340, 1350 (1966) (``With the 1934 Act now extended to 
thousands of additional companies by the 1964 Amendments, the need 
of a reexamination with an eye to coordination of the 1934 Act with 
the earlier one is all the greater'').
    \16\ See id. at 1341-42, stating ``[i]t is my thesis that the 
combined disclosure requirement of these statutes would have been 
quite different if the 1933 and 1934 Acts (the latter as extended in 
1964) had been enacted in opposite order, or had been enacted as a 
single, integrated statute--that is, if the starting point had been 
a statutory scheme of continuous disclosures covering issuers of 
actively traded securities and the question of special disclosures 
in connection with public offerings had been faced in this setting. 
Accordingly, it is my plea that there now be created a new 
coordinated disclosure system having as its basis the continuous 
disclosure system of the 1934 Act and treating ``1933 Act'' 
disclosure needs on this foundation.''
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    Subsequent to the publication of this article, the Commission 
initiated several studies that advanced efforts to integrate the 
Securities Act and Exchange Act disclosure regimes. These efforts 
included the Disclosure Policy Study led by Commissioner Francis Wheat 
\17\ and the report issued by the Advisory Committee on Corporate 
Disclosure led by former Commissioner A. A. Sommer, Jr. (``Sommer 
Report'').\18\ In 1969, the Wheat Report concurred with Cohen's 
proposal for a coordinated disclosure system. It recommended an 
enhanced degree of coordination between the disclosures required by the 
Securities Act and the Exchange Act and formulated specific proposals 
for integrating disclosure between the two Acts.\19\ In 1977, the 
Sommer Report suggested adopting a single, integrated disclosure system 
and recommended developing one coordinated disclosure form.\20\
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    \17\ See supra note 13.
    \18\ See Report of the Advisory Committee on Corporate 
Disclosure to the Securities and Exchange Commission, Cmte. Print 
95-29, House Cmte. On Interstate and Foreign Commerce, 95th Cong., 
1st. Sess (Nov. 3, 1977) available at https://opc-ad-ils/
InmagicGenie/DocumentFolder/
report%20of%20the%20advisory%20committee%20on%20corporate%20disclosur
e%20to%20the%20sec%2011011977.pdf.
    \19\ See generally Wheat Report.
    \20\ See Sommer Report at 420-432.
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    Following the Sommer Report, the Commission adopted the first 
version of Regulation S-K, which included only two disclosure 
requirements--a description of business and a description of 
properties.\21\ While additional disclosure requirements were added in 
1978 and 1980,\22\ Regulation S-K was significantly expanded and 
reorganized in 1982 as the repository for the uniform non-financial 
statement disclosure requirements under both the Securities Act and 
Exchange Act.\23\ With this expansion and reorganization, the 
Commission moved much of the guidance in the prior Industry Guides into 
Regulation S-K and amended the forms and schedules to reference 
requirements in Regulation S-K.\24\
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    \21\ See Adoption of Disclosure Regulation and Amendments of 
Disclosure Forms and Rules, Release No. 33-5893 (Dec. 23, 1977) [42 
FR 65554 (Dec. 30, 1977)] (``1977 Regulation S-K Adopting 
Release'').
    \22\ See S-K Study at 10, footnote 27.
    \23\ See id. at 10, footnote 28.
    \24\ For a discussion of the Industry Guides, see infra notes 
639 to 644 and accompanying text.
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    Many of the disclosure requirements in Regulation S-K originated in 
Schedule A of the Securities Act, which lists 27 items that must be 
disclosed in a registration statement and prospectus.\25\ Section 7 of 
the Securities Act provides that the registration statement shall 
contain the information and be accompanied by the documents specified 
in Schedule A, except the Commission may exercise its rulemaking 
authority to prescribe additional information or may permit prescribed 
information to be omitted as it deems necessary or appropriate in the 
public interest or for the protection of

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investors.\26\ Over the years, the Commission has exercised this 
authority to adopt various registration forms and disclosure 
requirements. While many of the disclosure requirements currently in 
Regulation S-K originated in Schedule A, the Commission has amended 
Regulation S-K numerous times since its adoption.\27\
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    \25\ 15 U.S.C. 77aa. Schedule A requires companies to provide 
information such as: General information about the company, its 
business and capital structure; information about the directors, 
principal officers, promoters and ten percent stockholders and 
remuneration of officers and directors; information about the 
offering; financial statements of the company and of any business to 
be acquired through the proceeds of the issue; and copies of 
agreements made with underwriters, opinions of counsel on legality 
of the issue, material contracts, the company's organizational 
documents and agreements or indentures affecting any securities 
offered.
    \26\ 15 U.S.C. 77g.
    \27\ For a comprehensive discussion of prior revisions to 
Regulation S-K, please see Sections II and III of the S-K Study at 
8-92.
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B. Broad Economic Considerations

    The purpose of corporate disclosure is to provide investors with 
information they need to make informed investment and voting decisions. 
Lowering information asymmetries between managers of companies and 
investors may enhance capital formation and the allocative efficiency 
of the capital markets. In particular, disclosure of information that 
is important for investment and voting decisions may lead to more 
accurate share prices, discourage fraud, heighten monitoring of the 
managers of companies, and increase liquidity. Effective disclosure 
requirements also should increase the integrity of securities markets, 
build investor confidence, and support the provision of capital to the 
market. In addition, such requirements can facilitate the coordination 
of registrants around consistent disclosure standards, increasing the 
efficiency with which investors can process the information.
    There are potential drawbacks associated with disclosure 
requirements. Disclosure can be costly for registrants to produce and 
disseminate, and disclosure of certain sensitive information can result 
in competitive disadvantages. There is also a possibility that high 
levels of immaterial disclosure can obscure important information or 
reduce incentives for certain market participants to trade or create 
markets for securities. The appropriate choice of disclosure 
requirements therefore involves certain tradeoffs. These tradeoffs may 
depend on the nature of the audience for disclosure and the 
characteristics of registrants.
    Markets are composed of a broad spectrum of investors with 
different information needs. Some investors may be highly sophisticated 
and have access to substantial resources to process and interpret data, 
while others may lack sophistication or have fewer resources to process 
and interpret data. Investors also may differ in their reliance on 
disclosure or on third-party analyses of disclosure. The breadth of the 
audience for disclosure may inform choices about what information is 
important to investment and voting decisions and should therefore be 
disclosed. The diversity of the audience for disclosure, and how 
different subsets of this audience access and digest information about 
registrants, will also affect decisions about how best to format and 
disseminate disclosure.
    The trade-off between the benefits and costs of disclosure 
requirements may vary across different types of registrants. For 
example, to the extent that our disclosure requirements impose fixed 
costs, they may impose a disproportionate burden on smaller 
registrants. At the same time, these registrants may have relatively 
simple operations and thus be able to promote an understanding of their 
business and financial condition with less disclosure than larger, more 
complex registrants. Accordingly, it may be appropriate to provide 
disclosure accommodations for certain types of registrants, while 
remaining cognizant of the potential adverse impacts that reduced 
disclosure may have on capital formation and the allocative efficiency 
of the capital markets.
    The benefits associated with disclosing certain items of 
information may be greater in some cases than in others, such as when 
an item of disclosure reflects an important part of one registrant's 
operations but an immaterial part of another's. In this context, it may 
be important to consider various approaches to trigger disclosure where 
it is more likely to be important, rather than in all cases. It may 
also be useful to have disclosure requirements, or guidance in 
fulfilling these requirements, that are specific to certain industries 
or other subsets of registrants. We seek to understand if disclosure 
requirements can be more appropriately tailored to registrants given 
the likely variation across registrants in the benefits and the costs 
of disclosing certain types of information. We discuss specific 
economic considerations in more detail below.

C. Prior Regulation S-K Modernization Initiatives and Studies

    From time to time, the Commission has assessed its disclosure 
requirements. Several of these studies focused on modernizing or 
simplifying disclosure requirements. Other initiatives focused on 
different aspects of the regulatory framework, such as the securities 
offering process or the financial reporting system, but had the effect 
of raising disclosure issues for further consideration or shaping 
current disclosure requirements. The Disclosure Effectiveness 
Initiative builds upon these prior studies and initiatives.
Task Force on Disclosure Simplification
    The Task Force on Disclosure Simplification (``Task Force''), 
comprising staff from across the Commission, was formed in 1995 to 
review regulations affecting capital formation with a view towards 
``streamlining, simplifying, and modernizing the overall regulatory 
scheme without compromising or diminishing important investor 
protections.'' \28\ In its report to the Commission in 1996, the Task 
Force recommended the Commission ``eliminate or modify many rules and 
forms, and simplify several key aspects of securities offerings.'' \29\ 
Based on the Task Force's recommendations, the Commission rescinded 
forty-five rules and six forms and adopted other minor or technical 
rule changes to eliminate unnecessary requirements and to streamline 
the disclosure process.\30\
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    \28\ See Report of the Task Force on Disclosure Simplification, 
available at www.sec.gov/news/studies/smpl.htm (Mar. 5, 1996) 
(``Task Force Report''). To facilitate its review, the Task Force 
met with issuers, investor groups, underwriters, accounting firms, 
law firms and other active participants in the capital markets.
    \29\ See id. stating `` . . . recommendations [of the task 
force] roughly fall into three categories: (1) Weeding out forms and 
regulations that are duplicative of other requirements or have 
outlived their usefulness; (2) Requiring more readable and 
informative disclosure documents; and (3) Reducing the cost of 
securities offerings and increasing access of smaller companies to 
the securities markets.''
    \30\ See Phase One Recommendations of Task Force on Disclosure 
Simplification, Release No. 33-7300 (May 31, 1996) [61 FR 30397 
(June 14, 1996)] (``Phase One Recommendations of Task Force on 
Disclosure Simplification Release''). For example, changes to 
Regulation S-K included eliminating four infrequently used (or 
otherwise already available) items from the list of required 
exhibits in Item 601(b) (opinion regarding discount on capital 
shares, opinion regarding liquidation preference, material foreign 
patents, and information from reports furnished to state insurance 
regulatory authorities).
    See also Phase Two Recommendations of Task Force on Disclosure 
Simplification, Release No. 33-7431 (July 18, 1997) [62 FR 43581 
(Aug. 14, 1997)] (``Phase Two Recommendations of Task Force on 
Disclosure Simplification Release'') (rescinding two forms and one 
rule and amending a number of rules and forms). The Commission 
further implemented certain of the recommendations in the Task Force 
Report relating to accounting disclosure rules that were identified 
as being largely duplicative of U.S. GAAP or other Commission rules.
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    The Task Force also made the following recommendations on 
Regulation S-K:
     Streamline Item 101's description of business disclosure 
by eliminating duplication of quantitative information about business 
segments and foreign operations provided in the financial statements;

[[Page 23920]]

     revise Item 102's description of property disclosure to 
elicit ``more meaningful and material disclosure;'' and
     eliminate Item 103's instruction to replace the $100,000 
standard with a general materiality standard for certain environmental 
legal proceedings to ensure registrants will not be required to 
disclose non-material information.\31\
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    \31\ The Task Force also generally recommended adjusting certain 
dollar thresholds in Regulation S-K and Regulation S-X for inflation 
since the time of their adoption. The Task Force cited, among other 
items, the $50,000 threshold in Item 509 of Regulation S-K (relating 
to disclosure of payments to experts and counsel) [17 CFR 229.509] 
and the $100,000 threshold in Rule 3-11 of Regulation S-X (relating 
to the definition of an inactive registrant) [17 CFR 210.3-11]. See 
Task Force Report.

While the Commission made a number of changes in response to the Task 
Force recommendations, the three items identified above were not 
adopted by the Commission. We revisit some of these issues in the 
questions presented below.
Report of the Advisory Committee on the Capital Formation and 
Regulatory Process
    Also in 1995, the Commission established the Advisory Committee on 
the Capital Formation and Regulatory Processes (``1995 Advisory 
Committee'') to advise on, among other things, the regulatory process 
and disclosure requirements for public offerings. The 1995 Advisory 
Committee's primary recommendation was implementing a system of 
``company registration.'' \32\
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    \32\ Under a ``company registration'' system, a company would, 
on a one-time basis, file a registration statement (deemed effective 
immediately) that includes information similar to that currently 
provided in an initial short-form shelf registration statement. This 
registration statement could then be used for all types of 
securities and all types of offerings. All current and future 
Exchange Act reports would be incorporated by reference into that 
registration statement, and around the time of an offering, 
transactional and updating disclosures would be filed with the 
Commission and incorporated into the registration statement. As part 
of this ``company registration'' system, companies would be required 
to adopt certain disclosure enhancements (and encouraged to adopt 
others) that seek to improve the quality and timeliness of 
disclosure provided to investors and the markets. See Securities Act 
Concepts and Their Effects on Capital Formation, Release No. 33-7314 
(July 25, 1996) [61 FR 40044 (July 31, 1996)] (``Securities Act 
Concept Release'').
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    Noting the Task Force Report, the 1995 Advisory Committee did not 
focus on specific line-item disclosure requirements but suggested 
disclosure enhancements as part of its recommendations for a system of 
``company registration.'' These enhancements included a management 
certification to the Commission for all periodic and current reports, a 
management's report to the audit committee to be filed as an exhibit to 
the Form 10-K, expansion of current reporting obligations on Form 8-K 
and a risk factor disclosure requirement in Form 10-K.\33\
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    \33\ See Report of The Advisory Committee on the Capital 
Formation and Regulatory Processes (July 24, 1996), available at 
https://www.sec.gov/news/studies/capform.htm.
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    After receiving reports from both the Task Force and the 1995 
Advisory Committee, the Commission issued a concept release on 
regulation of the securities offering process and also sought input on 
the 1995 Advisory Committee's proposed disclosure enhancements.\34\
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    \34\ See the Securities Act Concept Release. Many of the issues 
raised in the concept release were revisited in the Commission's 
1998 proposal to modernize the securities offering process (known as 
the ``Aircraft Carrier'' release), and in the Commission's 2005 
Securities Offering Reform rulemaking. Some of the proposals from 
the Aircraft Carrier release were later adopted. For example, the 
Aircraft Carrier release recommended inclusion of risk factor 
disclosure in Exchange Act registration statements and annual 
reports. This recommendation was adopted as part of Securities 
Offering Reform. See The Regulation of Securities Offerings, Release 
No. 33-7606A (Nov. 17, 1998) [63 FR 67174 (Dec. 4, 1998)] 
(``Aircraft Carrier Release'') and Securities Offering Reform, 
Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] 
(``Securities Offering Reform Release'').
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Plain English
    In 1998, the Commission adopted rules intended to improve the 
readability of prospectuses by promoting clear, concise and 
understandable disclosure (``Plain English Rules'').\35\ These rules 
required registrants to write the cover page, summary and risk factors 
section of prospectuses in plain English \36\ and were extended to 
Exchange Act reports in 2005.\37\
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    \35\ See Plain English Disclosure, Release No. 33-7497 (Jan. 28, 
1998) [63 FR 6370 (Feb. 6, 1998)] (``Plain English Disclosure 
Adopting Release'').
    \36\ Id.
    \37\ See Securities Offering Reform Release. As part of the 
Securities Offering Reform Release, Form 10-K was amended to require 
risk factor disclosure to be written in accordance with the same 
Plain English Rules that apply to risk factor disclosure in 
Securities Act registration statements. See also Part I, Item 1A of 
Form 10-K.
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Advisory Committee on Improvements to Financial Reporting
    In 2007, the Commission chartered the Advisory Committee on 
Improvements to Financial Reporting (``CIFiR Advisory Committee'') to 
examine the U.S. financial reporting system.\38\ While the CIFiR 
Advisory Committee did not recommend specific changes to Regulation S-
K, several of its suggestions sought to improve the usefulness of 
information in periodic reports.\39\ The Commission adopted some of 
these suggestions, which included updating the Commission's 
interpretive guidance on use of electronic media for disseminating 
information on a registrant's financial performance \40\ and adopting 
rules to require filing of interactive data-tagged financial 
statements.\41\
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    \38\ The dual goals of the CIFiR Advisory Committee were ``to 
examine the U.S. financial reporting system in order to make 
recommendations intended to increase the usefulness of financial 
information to investors, while reducing the complexity of the 
financial reporting system to investors, preparers, and auditors.'' 
See Final Report of the Advisory Committee on Improvements to 
Financial Reporting to the United States Securities and Exchange 
Commission (Aug. 1, 2008), (``CIFiR Advisory Committee Report''), 
available at https://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf.
    \39\ See CIFiR Advisory Committee Report (stating that 
``[i]ncreasing the usefulness of information in SEC reports'' was 
one of five themes underlying the CIFiR Advisory Committee's 
recommendations).
    \40\ In 2008, the Commission published interpretive guidance on 
the use of company Web sites as a means for companies to communicate 
and provide information to investors in compliance with the federal 
securities laws and, in particular, the Exchange Act. See Commission 
Guidance on the Use of Company Web sites, Release No. 34-58288 (Aug. 
1, 2008) [73 FR 45862 (Aug. 7, 2008)] (``2008 Web site Guidance''). 
When it published the 2008 Web site Guidance, the Commission noted 
that the guidance was prompted, in part, by the CIFiR Advisory 
Committee's efforts.
    \41\ In 2008, the Commission announced the 21st Century 
Disclosure Initiative, with the goal of preparing a plan for future 
action to modernize the Commission's disclosure system. The 
Initiative's report, issued in 2009, recommended a new disclosure 
system in which interactive data would replace plain-text disclosure 
documents while retaining the substantive content and filing 
schedule of the current system. See 21st Century Disclosure 
Initiative: Staff Report, Toward Greater Transparency: Modernizing 
the Securities and Exchange Commission's Disclosure System (Jan. 
2009), available at https://www.sec.gov/spotlight/disclosureinitiative/report.pdf.
    The Commission adopted rules in 2009 requiring companies to 
provide financial statement information in interactive data format 
using the eXtensible Business Reporting Language (``XBRL'') format. 
See Interactive Data to Improve Financial Reporting, Release No. 33-
9002 (Jan. 20, 2009) [74 FR 6776 (Feb. 10, 2009)] (``Interactive 
Data Release''). This adopting release notes the CIFiR Advisory 
Committee's recommendation to require filing of interactive data-
tagged financial statements.
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JOBS Act Report on Review of Disclosure Requirements in Regulation S-K
    The JOBS Act required the Commission to review Regulation S-K to 
determine how its disclosure requirements can be updated to modernize 
and simplify the registration process for EGCs.\42\ In response to this 
mandate, Commission staff published the S-K Study in December 2013. 
Although the Congressional mandate

[[Page 23921]]

focused on EGCs, the report was intended to facilitate the improvement 
of disclosure requirements applicable to companies at all stages of 
development.\43\
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    \42\ Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). For a 
discussion of EGCs, including the definition of ``emerging growth 
company,'' see Section IV.H.1.
    \43\ See S-K Study at 4.
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    The S-K Study recommended a comprehensive review of disclosure 
requirements in the Commission's rules and forms, including Regulations 
S-K and S-X, and identified specific areas for further review.\44\ It 
also recommended the Commission consider the following principles when 
reviewing and evaluating changes to disclosure requirements:
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    \44\ See id at 92-104. The S-K Study identified four issues for 
further study: (1) Generally, any recommended revisions should 
emphasize a principles-based approach as an overarching component of 
the disclosure framework while preserving the benefits of a rules-
based system; (2) any review of the disclosure requirements should 
evaluate the appropriateness of current scaled disclosure 
requirements and consider whether further scaling is appropriate for 
EGCs or other categories of companies; (3) any review of the 
disclosure requirements should evaluate methods of information 
delivery and presentation, both through EDGAR and other means; and 
(4) any review of disclosure requirements should consider ways to 
present information to improve the readability and navigability of 
disclosure and explore methods for discouraging repetition and 
disclosure of immaterial information. As to this fourth issue, the 
S-K Study suggested reevaluating quantitative thresholds and other 
materiality standards in Regulation S-K as well as reassessing 
requirements for information that is readily accessible, such as 
historical stock price information. Id. at 97-98.
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     Improving and maintaining the informativeness of 
disclosure;
     historical objectives of the rule and their continued or 
recurring relevance;
     whether the required information is available on a non-
discriminatory basis from reliable sources and, if so, any costs or 
benefits from obtaining the information other than from the registrant;
     administrative and compliance costs of the requirements;
     any competitive or economic costs of disclosing 
proprietary information;
     maintenance of the Commission's ability to conduct an 
effective enforcement program and deter fraud; and
     importance of maintaining investor confidence in the 
reliability of registrant information, in order to, among other things, 
encourage capital formation.\45\
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    \45\ See id. at 94-95.
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FAST Act Disclosure Modernization and Simplification
    Under the FAST Act,\46\ the Commission is required to carry out a 
study to determine how best to modernize and simplify the disclosure 
requirements in Regulation S-K and to propose revisions to those 
requirements.\47\ The FAST Act requires that the study of Regulation S-
K:
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    \46\ Public Law 114-94, 129 Stat. 1312 (2015).
    \47\ Public Law 114-94, Sec. 72003, 129 Stat. 1312 (2015).
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     Emphasize a company-by-company approach that allows 
relevant and material information to be disseminated to investors 
without boilerplate language or static requirements while preserving 
completeness and comparability of information across registrants; and
     evaluate methods of information delivery and presentation 
and explore methods for discouraging repetition and the disclosure of 
immaterial information.
In conducting this study, the Commission is required to consult with 
the Investor Advisory Committee and the Advisory Committee on Small and 
Emerging Companies and to issue a report of findings and 
recommendations to Congress.\48\ The FAST Act also requires the 
Commission to revise Regulation S-K to further scale or eliminate 
requirements to reduce the burden on EGCs, accelerated filers, smaller 
reporting companies (``SRCs''), and other smaller issuers, while still 
providing all material information to investors, and to eliminate 
duplicative, overlapping, outdated or superseded provisions.\49\
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    \48\ Id.
    \49\ Public Law 114-94, Sec. 72002, 129 Stat. 1312 (2015). The 
required revisions would not apply to provisions for which the 
Commission determines that further study is necessary to determine 
their efficacy.
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    Consistent with the S-K Study's recommendations and the FAST Act 
mandates, and in furtherance of the Commission's prior modernization 
studies and initiatives, we seek to evaluate components of our 
disclosure framework and revisit certain of our business and financial 
disclosure requirements to assess whether they continue to provide 
investors with information that is important to making informed 
investment and voting decisions. We also seek to evaluate whether 
current disclosure requirements should be revised to include different 
formats to facilitate the readability and navigability of disclosure, 
which we discuss in Section V of the release.

III. Disclosure Framework

A. Basis for Our Disclosure Requirements

    The Securities Act and the Exchange Act authorize the Commission to 
promulgate rules for registrant disclosure as necessary or appropriate 
in the public interest or for the protection of investors.\50\ The 
Commission has used this authority to require disclosure of information 
it believes is important to investors in both registration statements 
for public offerings and in ongoing reports.
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    \50\ See generally, Sections 7, 10, and 19(a) of the Securities 
Act [15 U.S.C. 77g(a)(10), 77j; and 77s(a)]; and Sections 3(b), 12, 
13, 14, 15(d), and 23(a) of the Exchange Act [15 U.S.C. 78c(b), 78l, 
78m(a), 78n(a), 78o(d), and 78w(a)].
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1. Statutory Mandates
The Securities Act and Exchange Act
    A central goal of the federal securities laws is full and fair 
disclosure.\51\ In enacting these laws, Congress recognized that 
investors must have access to accurate information important to making 
investment and voting decisions in order for the financial markets to 
function effectively. Thus, our disclosure rules are intended not only 
to protect investors but also to facilitate capital formation and 
maintain fair, orderly and efficient capital markets.
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    \51\ See Preamble of the Securities Act (stating it is an Act to 
provide full and fair disclosure of the character of securities sold 
in interstate and foreign commerce and through the mails, and to 
prevent frauds in the sale thereof, and for other purposes.). In 
enacting the mandatory disclosure system under the Exchange Act, 
Congress sought to promote complete and accurate information in the 
secondary trading markets. See S. Rep. No. 73-1455, 73rd Cong., 2nd 
Sess., 1934 at 68 (stating ``[o]ne of the prime concerns of the 
exchanges should be to make available to the public, honest, 
complete, and correct information regarding the securities listed'') 
and H.R. Rep. No. 73-1383, 73rd Cong., 2nd Sess., 1934 at 11 
(stating ``[t]here cannot be honest markets without honest 
publicity. Manipulation and dishonest practices of the market place 
thrive upon mystery and secrecy.'').
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    Schedule A of the Securities Act sets forth certain items of 
disclosure to be included in registration statements filed in public 
offerings and provides the basis for many of the disclosure 
requirements currently in Regulation S-K. Items in Schedule A are 
largely financial in nature and were intended to help investors assess 
a security's value. According to the House Report that preceded the 
Securities Act:

    The items required to be disclosed . . . are items indispensable 
to any accurate judgment upon the value of a security . . . The type 
of information required to be disclosed is of a character comparable 
to that demanded by competent bankers from their borrowers, and has 
been worked out in light of these and other requirements. They are . 
. . adequate to bring into full glare of publicity those elements of 
real and unreal values which may lie behind a security.\52\

    \52\ H.R Rep. No. 73-85, 73rd Cong., 1st Sess., 1933.
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The Exchange Act requires similar business and financial information to 
be

[[Page 23922]]

disclosed in Exchange Act registration statements and periodic 
reports.\53\
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    \53\ See Section 12(b)(1)(A) of the Exchange Act [15 U.S.C. 
78l].
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    In addition to mandating certain disclosure requirements, the 
Securities Act and the Exchange Act grant the Commission authority to 
modify and supplement these requirements as necessary or appropriate to 
implement the purpose of the statutes.\54\ Moreover, whenever it is 
engaged in rulemaking and is required to consider whether the action is 
necessary or appropriate in the public interest, the Commission must 
consider whether the action will promote efficiency, competition, and 
capital formation.\55\
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    \54\ See, e.g., Sections 19(a) and 28 of the Securities Act and 
Sections 3(b), 23(a)(1) and 36(a)(1) of the Exchange Act. [15 U.S.C. 
77s(a), 15 U.S.C. 77z-3] and [15 U.S.C. 78c(b), 15 U.S.C. 78w(a)(1), 
15 U.S.C. 78mm(a)(1)]. Section 19(a) of the Securities Act and 
Section 23(a)(1) of the Exchange Act grant the Commission authority 
to make such rules and regulations as may be necessary to carry out 
the provisions of each title; Section 3(b) of the Exchange Act 
provides that the Commission shall have power to define technical, 
trade, accounting, and other terms used in the Exchange Act, 
consistently with the provisions and purposes of the Exchange Act; 
Section 28 of the Securities Act and Section 36(a)(1) of the 
Exchange Act provide that the Commission may conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provision or provisions of each title or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.
    \55\ See, e.g., Section 2(b) of the Securities Act [15 U.S.C. 
77b(b)] and Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)]. See 
also Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)].
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Business and Financial Legislation
    From time to time, Congress has introduced additional disclosure 
requirements through other statutory mandates. Recent mandates have 
focused on corporate responsibility, corporate governance and providing 
enhanced business and financial information to investors. The Sarbanes-
Oxley Act of 2002 (``Sarbanes-Oxley Act'') \56\ mandated numerous 
changes to strengthen the accountability of public companies for their 
financial disclosure and required substantial Commission rulemaking to 
implement its provisions, many of which resulted in additions to 
Regulation S-K.\57\ In 2010, the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act'') \58\ required the 
Commission to adopt an array of disclosure provisions on corporate 
governance, executive compensation and specialized disclosure.\59\
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    \56\ Public Law 107-204, 116 Stat. 745 (2002).
    \57\ See S-K Study at 21-23, footnotes 57-62 and corresponding 
text for a discussion of additions made to Regulation S-K as a 
result of the Sarbanes-Oxley Act.
    \58\ Public Law 111-203, 124 Stat. 1376 (2010).
    \59\ See S-K Study at 28-29, footnotes 73-77 and corresponding 
text for a discussion of provisions in the Dodd-Frank Act that 
impact requirements in Regulation S-K.
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Other Legislation
    In some instances, Congress has mandated disclosure that is not 
necessarily financial in nature. These mandates have ranged from broad 
policy considerations to prescriptive directives. For example, under 
the National Environmental Policy Act of 1969 (``NEPA''),\60\ Congress 
required all federal agencies to include consideration of the 
environment in regulatory action. In response to this mandate, the 
Commission adopted environmental compliance and litigation disclosure 
requirements.\61\ Similarly, Section 1503 of the Dodd-Frank Act 
required registrants to include information about mine safety and 
health in their periodic reports. Although the disclosure requirements 
in Section 1503 were self-executing,\62\ the Act authorized the 
Commission to issue such rules or regulations as necessary for the 
protection of investors and to carry out the purposes of Section 
1503.\63\ To facilitate consistent compliance, the Commission adopted 
rules to codify the statutory disclosure requirements.\64\ More 
recently, the Iran Threat Reduction and Syria Human Rights Act of 2012 
(``ITRSHRA'') requires registrants to disclose certain business 
activities relating to Iran in their periodic reports.\65\
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    \60\ 42 U.S.C. 4321-4347.
    \61\ As a result of NEPA, the Commission issued an interpretive 
release in 1971 alerting companies to potential disclosure 
obligations that could arise from material environmental litigation 
and the material effects of compliance with environmental laws. The 
Commission later adopted more specific disclosure requirements 
relating to these matters and, in 1976, the Commission amended its 
forms to require disclosure of any material estimated capital 
expenditures for environmental control facilities.
    See Disclosures Pertaining to Matters Involving the Environment 
and Civil Rights, Release No. 33-5170 (July 19, 1971) [36 FR 13989 
(July 29, 1971)], Disclosure with Respect to Compliance with 
Environmental Requirements and Other Matters, Release No. 33-5386 
(April 20, 1973) [38 FR 12100 (May 9, 1973)], Disclosure of 
Environmental and Other Socially Significant Matters, Release No. 
33-5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 18, 1975)] (``Notice of 
Public Proceedings on Environmental Disclosure Release''), 
Conclusions and Final Action on Rulemaking Proposals Relating to 
Environmental Disclosure, Release No. 33-5704 (May 6, 1976) [41 FR 
21632 (May 27, 1976)] (``1976 Environmental Release''), Natural 
Resources Defense Council et al., v. SEC, 389 F. Supp. 689 (D.D.C. 
1974) (``Natural Resources Defense Council'').
    \62\ See Section 1503(f) of the Dodd-Frank Act. The disclosure 
requirements took effect 30 days after enactment of the Act.
    \63\ Id. at Section 1503(d)(2).
    \64\ See Mine Safety Disclosure, Release No. 33-9286 (Dec. 21, 
2011) [76 FR 81762 (Dec. 28, 2011)] (``Mine Safety Disclosure 
Release'').
    \65\ Public Law 112-158, 126 Stat. 1214 (2012). Section 219 of 
ITRSHRA amended Section 13 of the Exchange Act to add subsection 
(r). This subsection requires a company that files annual and 
quarterly reports under Section 13(a) of the Exchange Act to provide 
disclosure if, during the reporting period, it or any of its 
affiliates knowingly engaged in certain specified activities 
involving contacts with or support for Iran or other identified 
persons involved in terrorism or the creation of weapons of mass 
destruction. ITRSHRA was self-executing and required no substantive 
rulemaking by the Commission.
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2. Commission Responses to Market Developments
    Our disclosure regime includes requirements that we have adopted in 
response to market developments or advancements in technology. In 
response to the disorderly markets and damage to investors caused by 
the hot issue securities markets between 1967 and 1971, the Commission 
initiated hearings to determine the adequacy of existing disclosure 
requirements \66\ and adopted new disclosure requirements to elicit 
more meaningful information concerning all registrants and to 
communicate more effectively the economic realities of new 
registrants.\67\ Similarly, in 1994 in response to significant and 
sometimes unexpected losses in market risk sensitive instruments due 
to, among other things, changes in interest rates, foreign currency 
exchange rates and commodity prices, the Commission adopted Item 305 
(quantitative and qualitative disclosures about market risk).\68\
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    \66\ Hot issues result when the price of a new issuance of 
securities rises to a substantial premium over the initial offering 
price immediately or soon after the securities are first distributed 
to the public. In 1967-1971, the new issues markets experienced a 
resurgence. See Report of the Securities and Exchange Commission 
Concerning the Hot Issues Markets, August 1984, available at https://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1980/1984_0801_SECHotIssuesT.pdf. Between 1968 and 1970, the 
value of stocks traded on national securities exchanges fell a total 
of $78.8 billion, from $759.5 billion to $680.7 billion. See 
Securities and Exchange Commission, Thirty-Seventh Annual Report, 
appendix Table 5 at 221 (1971) available at https://www.sec.gov/about/annual_report/1971.pdf.
    \67\ See New Ventures, Meaningful Disclosure, Release No. 33-
5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)] (``Hot Issues 
Adopting Release'').
    \68\ See Disclosure of Accounting Policies for Derivative 
Financial Instruments and Derivative Commodity Instruments and 
Disclosure of Quantitative and Qualitative Information about Market 
Risk Inherent in Derivative Financial Instruments, Other Financial 
Instruments and Derivative Commodity Instruments, Release No. 33-
7386 (Jan. 31, 1997) [62 FR 6044 (Feb. 10, 1997)] (``Disclosure of 
Market Risk Sensitive Instruments Release'').
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    Significant advancements in technology have also prompted some of 
our disclosure requirements. The

[[Page 23923]]

Commission's efforts in Securities Offering Reform recognized the 
impact of technology on market demand for more timely corporate 
disclosure and the ability of issuers to capture, process, and 
disseminate this information.\69\ Similarly, modernization of our oil 
and gas rules was intended to update oil and gas disclosure 
requirements to align them with current practices and changes in 
technology.\70\
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    \69\ See Aircraft Carrier Release; Securities Offering Reform 
Release.
    \70\ See Modernization of Oil and Gas Reporting, Release No. 33-
8995 (Dec. 31, 2008) [74 FR 2157 (Jan. 14, 2009)] (``Oil and Gas 
Release'').
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    We are considering changes to our disclosure requirements and 
seeking public input on how our disclosure requirements could be 
improved for the benefit of investors and registrants and whether the 
requirements could be revised to adapt to future changes in market 
conditions and advancements in technology. We also are seeking input on 
the utility of mechanisms such as sunset provisions or temporary rules.
a. Comments Received
    S-K Study. One commenter stated that a sunset provision would 
require the Commission to consider changes in the economic, business 
and regulatory landscape in assessing whether new disclosure 
requirements should be made permanent.\71\ For significant new 
disclosure requirements, this commenter suggested a sunset provision of 
five or ten years and that formal Commission action should be required 
to indefinitely extend or modify any significant new disclosure 
requirement.
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    \71\ See letter from Ernst & Young (Sept. 11, 2012) (``Ernst & 
Young 1'').
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. We received a few comment 
letters that discussed potential regulatory mechanisms to review and 
update our disclosure requirements.\72\ To determine the continuing 
need for disclosures in light of the then current economic, business 
and regulatory landscape, one commenter suggested a formal, post-
adoption review process for significant new disclosure 
requirements.\73\ This review process, or ``sunset review,'' would 
require formal Commission action to make a new disclosure requirement 
permanent. Another commenter recommended that the Commission develop a 
mechanism to timely update disclosure requirements to address new 
topical issues and to delete existing disclosure when the informational 
value for investors is diminished.\74\ One commenter generally 
recommended sunset rules and finding a means to evaluate user demand 
and disclosure effectiveness for potentially outdated requirements.\75\
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    \72\ See, e.g., letters from the Society of Corporate 
Secretaries and Governance Professionals (Sept.10, 2014) 
(``SCSGP''), Securities Industry and Financial Markets Association 
(Oct. 13, 2014) (``SIFMA''), and letter and articles referenced 
therein from Arthur J. Radin (May 29, 2015) (``A. Radin'').
    \73\ See SCSGP. This commenter also suggested that the staff 
issue ``closing guidance'' when topics on which the staff had 
previously focused are no longer areas of primary concern. The 
commenter cited 2003 MD&A guidance on disclosure of critical 
accounting policies estimates as an example of guidance that could 
be considered closed. See Commission Guidance Regarding Management's 
Discussion and Analysis of Financial Condition and Results of 
Operation, Release No. 33-8350 (Dec. 19, 2003) (``2003 MD&A 
Interpretive Release'') [68 FR 75056 (Dec. 29, 2003)]. This 
commenter stated ``it is not clear that investors are unaware of the 
uncertainties associated with the methods, assumptions and estimates 
underlying a company's critical accounting measurements.''
    \74\ See SIFMA. This commenter did not propose a particular 
mechanism that the Commission should use.
    \75\ See A. Radin.
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b. Discussion
    When adopting disclosure requirements that have departed from 
traditional disclosure concepts, the Commission has historically taken 
an incremental approach to change by first adopting modest revisions 
and then expanding their application after observing and evaluating the 
rules' effectiveness. For example, the initial adoption of simplified 
registration and reporting requirements for smaller businesses on Form 
S-18 were ``in the nature of an experiment'' \76\ and a departure from 
traditional disclosure concepts.\77\ After observing relative, 
widespread acceptance of Form S-18 and the absence of significant 
disclosure or enforcement problems, the Commission expanded the form's 
availability,\78\ and it eventually served as a model for our current 
system of scaled disclosure for SRCs.\79\
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    \76\ See Simplified Registration and Reporting Requirements for 
Small Issuers, Release No. 33-6049 (Apr. 3, 1979) [44 FR 21562 (Apr. 
10, 1979)] (``Form S-18 Release'') at 21564.
    \77\ Id. at 21562 (``The Commission will monitor closely the use 
of Form S-18 for an appropriate period . . .'').
    \78\ See Availability of Simplified Registration Form to Certain 
Mining Companies, Release No. 33-6299 (Mar. 27, 1981) [46 FR 18947 
(Mar. 27, 1981)]. See also Revisions to the Optional Form for the 
Registration of Securities to Be Sold to the Public by the Issuer 
for an Aggregate Cash Price Not To Exceed $5,000,000, Release No. 
33-6406 (June 4, 1982) [47 FR 25126 (June 10, 1982)] (expanding Form 
S-18's availability to non-corporate registrants and registrants 
engaged, or to be engaged, in oil and gas related operations).
    \79\ See Smaller Reporting Company Regulatory Relief and 
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 
4, 2008)] (``SRC Adopting Release''). In adopting the current scaled 
disclosure regime, the Commission stated ``[t]he amendments that we 
are adopting address the need to revisit and adjust the Commission's 
small company policies to reflect changes in our securities markets 
as well as changes to the regulatory landscape since 1992, when the 
Commission first adopted an integrated scaled disclosure system for 
small business in Regulation S-B. The Commission adopted Regulation 
S-B and its associated Forms SB-1 and SB-2 based upon the success of 
Form S-18 . . .''
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    The Commission has, on occasion, adopted temporary rules or rules 
with automatic sunset provisions to better assess the effect of or 
necessity for a particular rule before adopting the rule on a permanent 
basis. For example, Securities Act Rule 415, which permits delayed and 
continuous offerings under certain circumstances, was initially adopted 
on a temporary basis for a period of nine months during which the 
Commission monitored the operation and impact of the new rule.\80\ 
Following public hearings and comment on Rule 415, the Commission 
determined additional experience with the rule was necessary to study 
its operation and impact \81\ and extended the temporary nature of this 
rule.\82\ The Commission permanently adopted Rule 415 following 18 
months of monitoring the operation and impact of the rule.\83\
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    \80\ See 1982 Integrated Disclosure Adopting Release.
    \81\ See Delayed or Continuous Offering and Sale of Securities, 
Release No. 33-6423 (Sept. 2, 1982) [47 FR 39799 (Sept. 10, 1982)].
    \82\ Id. In June 1983, the Commission published the shelf 
registration rule for comment again in order to provide all 
interested parties another opportunity to share their views and 
experience under the Rule before the Commission made its final 
determination. See Delayed or Continuous Offering and Sale of 
Securities, Release No. 33-6470, (June 9. 1983) [48 FR 27768 (June 
17, 1983)].
    \83\ See Shelf Registration, Release No. 33-6499 (Nov. 17, 1983) 
[48 FR 52889 (Nov. 23, 1983)].
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    While the Commission acted to permanently adopt Rule 415, it has 
allowed other temporary rules to expire. The Commission adopted on a 
temporary basis Securities Act Rules 702 and 703. Rule 702 required the 
filing of a Form 701 after sales under Rule 701 exceeded a particular 
threshold. Rule 703 disqualified registrants from relying on the Rule 
701 exemption from registration where the registrant failed to make the 
filing required by Rule 702.\84\ In adopting Rules 702 and 703, the 
Commission noted the importance of monitoring new exemptive provisions 
and stated that it would use Form 701 to ``assess the utility of the 
exemption and, oversee

[[Page 23924]]

any abuses.'' \85\ The Commission did not extend Rules 702 and 703 
based on its belief that the sunset of these rules had not compromised 
investor interests and that their reinstitution of the rules would 
serve little purpose.\86\
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    \84\ See Compensatory Benefit Plans and Contracts, Release No. 
33-6768 (Apr. 14, 1988) [53 FR 12918 (Apr. 20, 1988)] (adopting Rule 
701, an exemption from registration for certain offers and sales 
made pursuant to the terms of compensatory benefit plans or written 
compensation agreements for issuers that are not subject to the 
reporting requirements of Section 13 or 15(d) of the Exchange Act, 
and adopting rules 702 and 703 on a temporary basis of five years).
    \85\ See Regulation D Revisions; Exemption for Certain Employee 
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan. 
30, 1987)] at 3021.
    \86\ See Phase One Recommendations of Task Force on Disclosure 
Simplification Release.
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    Even in the absence of a temporary rule or sunset provision, the 
Commission has undertaken efforts to study the effects of new rules or 
amendments. The Commission uses these studies to guide future 
amendments or rulemaking. For example, our staff has examined the 
effects on capital formation through private placements after adoption 
of amendments to Regulation D in accordance with the JOBS Act.\87\ In 
adopting amendments to Rule 506 of Regulation D \88\ to eliminate the 
prohibition against general solicitation for a subset of Rule 506 
offerings, the Commission stated that the staff will monitor 
developments in the market for these offerings.\89\ In addition, in 
connection with recently adopted amendments to Regulation A, an 
exemption from registration for smaller issues of securities, and the 
adoption of Regulation Crowdfunding, a new exemption for smaller 
securities offerings using the Internet through crowdfunding, the 
Commission stated, in each case, that the staff will study and submit a 
report to the Commission on the impact of the regulation on capital 
formation and investor protection.\90\
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    \87\ Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov, 
Capital Raising in the U.S.: An Analysis of the Market for 
Unregistered Securities Offerings, 2009-2014, Oct. 2015, available 
at https://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf.
    \88\ 17 CFR 230.506.
    \89\ See Eliminating the Prohibition Against General 
Solicitation and General Advertising in Rule 506 and Rule 144A 
Offerings, Release No. 33-9415 (July 20. 2013) [78 FR 44771 (July 
24, 2013)].
    \90\ See Amendments to Regulation A, Release No. 33-9741 (Mar. 
25, 2015) [80 FR 21805 (Apr. 20, 2015)] (``2015 Regulation A 
Release''); See Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) 
[80 FR 71387 (Nov. 16, 2015)] (``Crowdfunding Adopting Release''). 
When proposing the crowdfunding rules, the Commission directed the 
staff to develop a work plan to review and monitor use of the 
crowdfunding rules, focusing on the types of issuers using the 
exemption, level of compliance by issuers and intermediaries, and 
whether the exemption is promoting new capital formation while 
providing key protections for investors. See Crowdfunding, Release 
No. 33-9470 (Oct. 23, 2013) [78 FR 66427 (Nov. 5, 2013)].
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    Requiring affirmative Commission action to extend or make permanent 
certain requirements, the utility of which may change over time, could 
require us to more frequently consider the effectiveness of our 
requirements. Alternatively, the Commission could commit to studying 
the impact of certain rule changes on a specified schedule, without 
making the rules temporary or applying automatic sunset provisions. Any 
such review would be in addition to the periodic review currently 
required by the Regulatory Flexibility Act (``RFA''),\91\ under which 
the Commission reviews its rules that have a significant economic 
impact on a substantial number of small entities within ten years of 
their publication as final rules.\92\ These approaches would, however, 
require significant Commission resources and could compete with other 
Commission priorities.
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    \91\ [5 U.S.C. 610(a)].
    \92\ Each year, since 1981, the Commission provides the public 
with notice that these rules are scheduled for review and invites 
public comment on whether the rules should be continued without 
change, or should be amended or rescinded to minimize any 
significant economic impact of the rules upon a substantial number 
of such small entities. As a matter of policy, the Commission 
reviews all final rules that are published for notice and comment to 
assess not only their continued compliance with the RFA, but also to 
assess generally their continued utility. See, e.g., List of Rules 
to be Reviewed Pursuant to the Regulatory Flexibility Act, Release 
No. 33-9965 (Oct. 22, 2015) [80 FR 65973 (Oct. 28, 2015)]. In the 
past, the Commission has received little or no comment on the rules 
that it publishes for review.
---------------------------------------------------------------------------

c. Request for Comment
    1. Should the Commission consider including automatic sunset 
provisions in new disclosure requirements? If so, what types of 
disclosure requirements should include these provisions? What factors 
should we consider in identifying them? What would be an appropriate 
length of time for any sunset provisions? Would this length of time 
vary with the nature of the rule in question?
    2. What are the advantages and disadvantages of automatic sunset 
provisions? Would automatic sunset provisions result in unnecessary 
regulatory uncertainty for investors or registrants?
    3. How would the use of automatic sunset provisions affect 
registrants, investors and other users of disclosure? Would 
registrants, investors or other users incur increased costs associated 
with the use of automatic sunset provisions?
    4. Should we consider requiring the staff to study and report to 
the Commission on the impact of new disclosure requirements when 
adopting them, in addition to the review the Commission performs under 
the RFA? For what type of disclosure requirements would such an 
approach be appropriate? What are the advantages and disadvantages of 
such a study and report on a new rule?
    5. Are there other ways our disclosure requirements could be 
revised to adapt more easily to future market changes and technological 
advancements?

B. Nature of Our Disclosure Requirements

    The concept of materiality has been described as ``the 
cornerstone'' of the disclosure system established by the federal 
securities laws.\93\ Schedule A to the Securities Act identifies 
certain categories of information that are generally viewed as material 
to investors.\94\ Those categories are incorporated and expanded upon 
in the categories of information that registrants are required to 
disclose under Regulation S-K.
---------------------------------------------------------------------------

    \93\ See Sommer Report at 320.
    \94\ See id. at 324.
---------------------------------------------------------------------------

    In creating and implementing our system of integrated disclosure, 
identification of material information was one of two principal 
objectives. In the 1982 Integrated Disclosure Adopting Release, the 
Commission stated:

    The Commission's program to integrate the disclosure systems has 
focused on two principal objectives: First, a comprehensive 
evaluation of the disclosure policies and procedures under both Acts 
to identify the information which is material to security holders 
and investors in both the distribution process and the trading 
markets . . . and, second, a determination of the circumstances 
under which information should be disseminated to security holders, 
investors and the marketplace.\95\
---------------------------------------------------------------------------

    \95\ See 1982 Integrated Disclosure Adopting Release at 11382. 
See also Proposed Comprehensive Revision to System for Registration 
of Securities of Securities Offerings, Rel. No. 33-6235 (Sept. 2, 
1980) [45 FR 63693 (Sept. 25, 1980)] (``1980 Proposed Revisions'') 
at 63694. This proposing release states ``[t]he shape of the 
[Commission's integrated disclosure] program will be influenced by 
the answer to two fundamental questions: (1) What information is 
material to investment decisions in the context of public offerings 
of securities; and (2) Under what circumstances and in what form 
should such material information be disseminated and made available 
by companies making public offerings of securities to the various 
participants in the capital market system? The task of identifying 
what information is material to investment and voting decisions is a 
continuing one in the field of securities regulation.''

    The Commission adopted line-item requirements in Regulation S-K and 
its predecessors to provide investors with specific disclosure within 
broad categories of material information.\96\ Through its disclosure 
requirements, the Commission has adopted different approaches to guide 
registrants in

[[Page 23925]]

evaluating materiality for purposes of disclosure, including in some 
cases using quantitative thresholds to address uncertainty in the 
application of materiality.
---------------------------------------------------------------------------

    \96\ See Sommer Report at 324.
---------------------------------------------------------------------------

1. Principles-Based and Prescriptive Disclosure Requirements
    Principles-based disclosure requirements. Many of our rules require 
disclosure when information is material to investors.\97\ These rules 
rely on a registrant's management to evaluate the significance of 
information in the context of the registrant's overall business and 
financial circumstances and determine whether disclosure is 
necessary.\98\ The requirements are often referred to as ``principles-
based'' because they articulate a disclosure objective and look to 
management to exercise judgment in satisfying that objective.\99\
---------------------------------------------------------------------------

    \97\ On several occasions, the Commission has reiterated that 
its requirements seek disclosure of material information. See, e.g., 
Commission Guidance Regarding Disclosure Related to Climate Change, 
Release No. 33-9106 (Feb. 8, 2010) [75 FR 6290 (Feb. 8, 2010)] 
(``Climate Change Release'') at 6292-6293 (stating ``During the 
1970s and 1980s, materiality standards for disclosure under the 
federal securities laws also were more fully articulated. Those 
standards provide that information is material if there is a 
substantial likelihood that a reasonable investor would consider it 
important in deciding how to vote or make an investment decision, 
or, put another way, if the information would alter the total mix of 
available information.''); Statement of the Commission Regarding 
Disclosure of Year 2000 Issues and Consequences by Public Companies, 
Investment Advisers, Investment Companies, and Municipal Securities 
Issuers, Release No. 33-7558 (Jul. 29, 1998) [63 FR 41394 (Aug. 4, 
1998)] (``Year 2000 Release'') at 41395 (stating ``Our disclosure 
framework requires companies to disclose material information that 
enables investors to make informed investment decisions.''); Timely 
Disclosure of Material Corporate Events, Release No. 33-5092 (Oct. 
15, 1970) [35 FR 16733 (Oct. 29, 1970)] at 16733-16734 
(``Notwithstanding the fact that a company complies with such 
[annual, semi-annual and current] reporting requirements, it still 
has an obligation to make full and prompt announcements of material 
facts regarding the company's financial condition . . . Corporate 
managements are urged to review their policies with respect to 
corporate disclosure and endeavor to set up procedures which will 
insure that prompt disclosure be made of material corporate 
developments . . .''). See also infra note 107.
    \98\ See Sommer Report at 322 (``Although the initial 
materiality determination is management's, this judgment is, of 
course, subject to challenge or question by the Commission or in the 
courts.'').
    \99\ See Study Pursuant to Section 108(d) of the Sarbanes-Oxley 
Act of 2002 on the Adoption of a Principles-Based Accounting System, 
July 2003, available at https://www.sec.gov/news/studies/principlesbasedstand.htm (``Section 108 Study'').
---------------------------------------------------------------------------

    For example, Item 303(a)(2) requires registrants to disclose 
material commitments for capital expenditures, known material trends in 
the registrant's capital resources, and expected material changes in 
the mix and relative cost of such resources.\100\ Similarly, Item 
101(c)(1)(xi) requires registrants to disclose the estimated amount 
spent during each of the last three fiscal years on company-sponsored 
research and development activities, if material.\101\
---------------------------------------------------------------------------

    \100\ Item 303(a)(2) of Regulation S-K [17 CFR 229.303(a)(2)].
    \101\ Item 101(c)(1)(xi) of Regulation S-K [17 CFR 
229.101(c)(1)(xi)].
---------------------------------------------------------------------------

    Prescriptive disclosure requirements. Some of our rules employ 
objective, quantitative thresholds to identify when disclosure is 
required, or require registrants to disclose information in all cases. 
These requirements are sometimes referred to as ``prescriptive'' or 
``rules-based'' because they rely on bright-line tests rather than 
management's judgment to determine when disclosure is required.
    For example, disclosure requirements specific to environmental 
proceedings in Item 103 enumerate thresholds for disclosure based on a 
percentage of current assets (10%) or a specified dollar amount 
($100,000).\102\ Meeting or exceeding the applicable thresholds 
necessitates disclosure. Similarly, Item 101(c)(1)(i), requires 
registrants to disclose for each of the last three fiscal years the 
amount or percentage of total revenue contributed by any class of 
similar products or services which accounted for ten percent or more of 
consolidated revenue in any of the last three fiscal years or fifteen 
percent or more of consolidated revenue, if total revenue did not 
exceed $50 million during any of such fiscal years.\103\ As another 
example, Item 703 establishes a requirement for registrants to disclose 
all repurchases of equity securities by issuers and affiliated 
purchasers.\104\
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    \102\ Instructions 5.B and 5.C to Item 103 of Regulation S-K [17 
CFR 229.103]. See also infra note 120.
    \103\ Item 101(c)(1)(i) of Regulation S-K [17 CFR 
229.101(c)(1)].
    \104\ Item 703 of Regulation S-K [17 CFR 229.703].
---------------------------------------------------------------------------

    Materiality. The concept of materiality is used throughout the 
federal securities laws. The Commission has used a definition of 
materiality since at least 1937. Previously, the Commission defined 
``material,'' when used to qualify a requirement for the furnishing of 
information, as ``those matters as to which an average prudent investor 
ought reasonably to be informed before buying or selling the security 
registered.'' \105\ In 1982, the Commission revised Rule 12b-2, which 
defines ``material'' when used to qualify a requirement for the 
furnishing of information, to adopt the Supreme Court's definition of 
materiality.\106\
---------------------------------------------------------------------------

    \105\ Proposed Revisions of Regulation C, Registration and 
Regulation 12B, Registration and Reporting, Release No. 33-6333 
(August 6, 1981) [46 FR 41971 (Aug. 18, 1981)] (``1981 Proposed 
Revisions''). The proposing release notes that, prior to proposing 
this definition, the definition of ``material'' was the same as 
adopted in 1937. This definition provided ``[t]he term `material', 
when used to qualify a requirement for the furnishing of information 
as to any subject, limits the information required to those matters 
as to which an average prudent investor ought reasonably to be 
informed before buying or selling the security registered.'' See, 
e.g., Adoption of Amendments to General Rules and Regulations, 
Release No. 34-4194 (Dec. 17, 1948) [not published in the Federal 
Register] (``1948 Adoption of Amendments to General Rules and 
Regulations Release'').
    \106\ See 1982 Integrated Disclosure Adopting Release. Rule 12b-
2 of the Exchange Act provides that the term ``material,'' when used 
to qualify a requirement for the furnishing of information as to any 
subject, limits the information required to those matters to which 
there is a substantial likelihood that a reasonable investor would 
attach importance in determining whether to buy or sell the 
securities registered. [17 CFR 240.12b-2].
    In addition to the information required to be disclosed, 
Exchange Act Rule 12b-20 requires registrants to disclose such 
further material information, if any, as may be necessary to make 
the required statements, in the light of the circumstances under 
which they are made, not misleading. Rule 12b-20 of the Exchange Act 
[17 CFR 240.12b-20].
---------------------------------------------------------------------------

    The Court has held that information is material if there is a 
substantial likelihood that a reasonable investor would consider the 
information important in deciding how to vote or make an investment 
decision.\107\ The Court further explained that information is material 
if there is a substantial likelihood that disclosure of the omitted 
fact would have been viewed by the reasonable investor as having 
significantly altered the ``total mix'' of information available.\108\
---------------------------------------------------------------------------

    \107\ See Basic Inc. v. Levinson, 485 U.S. 224 (1988) (``Basic'' 
or ``Basic v. Levinson'') at 231, quoting TSC Industries, Inc. v. 
Northway, Inc., 426 U.S. 438 (1976) (``TSC Industries'') at 449. In 
TSC Industries, the Supreme Court adopted a standard for materiality 
in connection with proxy statement disclosure under Schedule 14A and 
Rule 14a-9 of the Exchange Act. This standard was supported by the 
Commission. See TSC Industries at footnote 10 (``. . . the SEC's 
view of the proper balance between the need to insure adequate 
disclosure and the need to avoid the adverse consequences of setting 
too low a threshold for civil liability is entitled to consideration 
. . . The standard we adopt is supported by the SEC.''). In Basic, 
the Court reaffirmed this standard of materiality and applied it in 
the Section 10(b) and Rule 10b-5 context. Exchange Act Rule 10b-5(b) 
prohibits any person from making an untrue statement of material 
fact or omitting a material fact necessary to make the statements 
made, in light of the circumstances under which they were made, not 
misleading in connection with the offer or sale of any security. 
Rule 10b-5 of the Exchange Act [17 CFR 240.10b-5].
    \108\ See Matrixx Initiatives, Inc. v. Siracusano, 131 U.S. 1309 
(2011) (``Matrixx Initiatives'') at 1318, quoting TSC Industries at 
449. In Matrixx Initiatives, the Court applied the materiality 
standard, as set forth in TSC Industries and Basic. In articulating 
these standards, the Supreme Court recognized that setting too low 
of a materiality standard for purposes of liability could cause 
management to ``bury shareholders in an avalanche of trivial 
information.'' Id. at 1318, quoting TSC Industries at 448-449.

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[[Page 23926]]

    In proposing to revise Rule 12b-2 to adopt the Court's definition 
of ``material,'' the Commission noted the trend to apply the Court's 
definition in every type of federal securities law violation and 
concluded that the same test would be applied for any purpose under the 
Securities Act and the Exchange Act.\109\ Although some commenters 
recommended retaining the current definition or modifying the proposed 
one, the Commission adopted the definition as proposed because it was 
based on the definition set forth by the Court.\110\
---------------------------------------------------------------------------

    \109\ See id.
    \110\ See 1982 Integrated Disclosure Adopting Release.
    Article 1-02(o) of Regulation S-X retains the definition of 
``material'' prior to TSC Industries. In Staff Accounting Bulletin 
No. 99, the staff indicated that it views this definition in 
Regulation S-X to be similar to the definitions of ``material'' in 
Rule 12b-2 of the Exchange Act and Rule 405 of the Securities Act, 
which are consistent with TSC Industries. See footnote 6 of Staff 
Accounting Bulletin No. 99, Release No. SAB 99 (Aug. 12, 1999) [64 
FR 45150 (Aug. 19, 1999)] (``SAB 99''). As with any staff guidance 
referenced in this release, the views of the staff are not rules or 
interpretations of the Commission. The Commission has neither 
approved nor disapproved the views of the staff.
---------------------------------------------------------------------------

    From time to time, the Commission has provided guidance to assist 
management in the types of assessments to make and issues to consider 
in determining whether information is material.\111\ For example, based 
on a review of MD&A disclosure to evaluate the adequacy of disclosure 
practices and identify any common deficiencies, the Commission provided 
interpretive guidance on assessments management should make to 
determine whether disclosure of forward-looking information is required 
under Item 303 of Regulation S-K.\112\ Similarly, in the context of 
determining whether financial statements must be restated, Commission 
staff has expressed the view that materiality determinations cannot be 
reduced to a numerical formula and evaluations of materiality require 
both quantitative and qualitative considerations.\113\
---------------------------------------------------------------------------

    \111\ See, e.g., Climate Change Release (providing guidance as 
to how registrants should evaluate climate change-related issues 
when considering what information to disclose to investors under 
existing disclosure requirements and confirming that, if material, 
registrants should provide climate change-related disclosure); 2003 
MD&A Interpretive Release (providing guidance on MD&A and 
emphasizing that registrants should focus on materiality).
    \112\ See, e.g., Management's Discussion and Analysis of 
Financial Condition and Results of Operations; Certain Investment 
Company Disclosures, Release No. 33-6835 (May 18, 1989) [54 FR 22427 
(May 24, 1989)] (``1989 MD&A Interpretive Release'') (setting forth 
a two-step analysis for disclosure of material forward-looking 
information in MD&A). For a discussion of the Commission's forward-
looking guidance under Item 303 of Regulation S-K and recent court 
of appeals decisions, see Section IV.B.3.c.
    \113\ See SAB 99.
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a. Comments Received
    S-K Study. We received three comment letters that discussed 
principles-based requirements or made recommendations about 
quantitative disclosure thresholds.\114\ Two commenters suggested that 
we move towards a more principles-based disclosure regime in which 
``companies [would be] expected to take the initiative to identify 
material information rather than simply respond to an extensive list of 
potentially relevant line-item disclosure requirements.'' \115\ Another 
commenter stated that it is counterintuitive to define disclosure 
requirements using a ``one-size-fits-all quantitative thresholds.'' 
\116\
---------------------------------------------------------------------------

    \114\ See letters from Fenwick & West LLP, Cooley LLP and Wilson 
Sonsini Goodrich & Rosati, PC (June 19, 2012) (``Silicon Valley''), 
Mike Liles (Apr. 10, 2013) (``M. Liles'') (endorsing the comments 
expressed in the Silicon Valley letter) and Ernst & Young 1.
    \115\ See Silicon Valley and M. Liles.
    \116\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Several commenters addressed 
whether disclosure requirements should be principles-based or 
prescriptive.\117\ The majority of these commenters supported a 
principles-based system.\118\ Some of these commenters suggested 
revising or eliminating existing prescriptive disclosure 
requirements.\119\ One of these commenters stated that the ``touchstone 
for any disclosure requirement must be materiality as seen through the 
eyes of a reasonable investor'' and suggested reviewing the 
quantitative disclosure thresholds in Items 103 and 404 of Regulation 
S-K \120\ to consider whether they are appropriate.\121\ Another one of 
these commenters suggested amending Item 10 \122\ of Regulation S-K to 
permit registrants to omit information otherwise required by Regulation 
S-K if the information is not material and if the inclusion of the 
information is not necessary to make any required statements not 
materially misleading.\123\ However, this commenter noted that this 
provision should not apply in all instances.\124\ This commenter also 
suggested revisions to some of the quantitative disclosure thresholds 
in Regulation S-K to ``better calibrate'' such requirements \125\ and 
recommended that the Commission determine whether disclosure standards 
other than materiality should be harmonized to ``lessen ambiguity as to 
how these undefined disclosure standards should be applied.'' \126\
---------------------------------------------------------------------------

    \117\ See, e.g., letters from Center for Capital Markets 
Competitiveness, U.S. Chamber of Commerce (July 29, 2014) (``CCMC'') 
(expressing support for a more principles-based approach to 
disclosure); SCSGP (recommending that we eliminate line-item 
disclosure requirements that apply without regard to materiality or 
that contain quantitative disclosure thresholds that do not 
appropriately reflect materiality); Standards & Financial Market 
Integrity Division, CFA Institute (Nov. 12, 2014) (``CFA 
Institute'') (stating that a principles-based system could lead to 
standards that are inconsistently applied); Shearman & Sterling LLP 
(Nov. 26, 2014) (``Shearman'') (stating that a principles-based 
approach would better withstand the pace at which the business 
environment changes); letter from the Federal Regulation of 
Securities Committee, Business Law Section, American Bar Association 
(Mar. 6, 2015) (``ABA 2''); UK Financial Reporting Council (Mar. 10, 
2015) (``UK Financial Reporting Council''); Corporate Governance 
Committee of the Business Roundtable (Apr. 5, 2015) (``Business 
Roundtable''); A. Radin.
    \118\ See, e.g., CCMC; SCSGP; ABA 2; Shearman; UK Financial 
Reporting Council; Business Roundtable.
    \119\ See, e.g., CCMC; SCSGP; Shearman; ABA 2.
    \120\ Item 103 of Regulation S-K requires disclosure of material 
pending legal proceedings. Instruction 2 specifies that no 
information need be given with respect to a proceeding that involves 
primarily a claim for damages if the amount involved, exclusive of 
interest and costs, does not exceed ten percent of current assets of 
the registrant and its subsidiaries on a consolidated basis.
    Instruction 5 to Item 103 requires disclosure of proceedings 
related to federal, state, or local environmental protection laws 
when (i) the proceeding is material to the registrant's business or 
financial condition; (ii) the proceeding involves primarily a claim 
for damages, or involves potential monetary sanctions, capital 
expenditures, deferred charges or charges to income and the amount 
involved, exclusive of interest and costs, exceeds ten percent of 
current assets of the registrant and its subsidiaries on a 
consolidated basis; or (iii) a governmental authority is a party to 
a proceeding involving monetary sanctions, unless the registrant 
believes that the proceeding will result in no monetary sanctions, 
or in monetary sanctions, exclusive of interests and costs, of less 
than $100,000. [17 CFR 229.103].
    Item 404 requires disclosure of transactions with related 
parties where the related party had or will have a direct or 
indirect material interest and the amount involved exceeds $120,000 
or, in the case of SRCs, where the amount involved exceeds the 
lesser of $120,000 or one percent of the average of the SRC's total 
assets at year end for the last two completed fiscal years. [17 CFR 
229.404].
    \121\ See CCMC (noting that quantitative thresholds similar to 
the ones in Item 103 ``may not in fact be set at levels material for 
all, or even most companies'').
    \122\ Item 10 of Regulation S-K contains general requirements on 
the application of Regulation S-K, Commission policies on 
projections and security ratings, incorporation by reference and the 
use of non-GAAP financial measures in Commission filings. [17 CFR 
229.10].
    \123\ See ABA 2.
    \124\ See id. (citing the $120,000 threshold in Item 404 as an 
example of an instance in which the use of a quantitative disclosure 
threshold is appropriate).
    \125\ See id. For example, this commenter suggested increasing 
the quantitative threshold in Instruction 5.C to Item 103 from 
$100,000 to $1,000,000.
    \126\ Id. As an example, this commenter noted that ``major'' is 
used as a standard in Items 101(h)(4)(vi), 102, and 
601(b)(10)(ii)(B).

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[[Page 23927]]

    Two commenters stated that a principles-based approach would 
provide additional flexibility to registrants by allowing them to 
disclose material information based on all relevant facts and 
circumstances.\127\ One commenter, in lieu of creating new item 
requirements, encouraged greater staff guidance through disclosure 
guidance topics or staff bulletins to provide companies with factors to 
consider when making materiality determinations.\128\ One commenter 
stated that using materiality as a guiding principle ``carries with it 
the recognition that what is important to a reasonable investor may 
change over time.'' \129\ Another commenter suggested that accounting 
professionals should readdress the concept of materiality and this 
would help reduce the volume of unnecessary disclosure.\130\
---------------------------------------------------------------------------

    \127\ See SCSGP; Shearman.
    \128\ See SCSGP.
    \129\ See Business Roundtable.
    \130\ See A. Radin.
---------------------------------------------------------------------------

    One commenter opposed a principles-based system, stating such a 
system could result in inconsistent application of the principles-based 
threshold and thus non-comparable information across companies.\131\ 
This commenter also stated that the use of prescriptive disclosure 
requirements does not prevent companies from including additional 
principles-based disclosure if the company would like to do so.\132\
---------------------------------------------------------------------------

    \131\ See CFA Institute (also citing MD&A disclosure during the 
financial crisis as evidence that principles-based reporting 
requirements alone are not sufficient).
    \132\ Id.
---------------------------------------------------------------------------

b. Discussion
    In 2003, the staff prepared a study on the adoption of a 
principles-based accounting system.\133\ Although it did not address 
disclosure requirements under Regulation S-K, many of the study's 
conclusions may be relevant to our general consideration of principles-
based disclosure standards. The study found drawbacks to establishing 
accounting standards on either a rules-based or a principles-based 
approach.\134\ The study noted that principles-only standards may 
present enforcement difficulties because they are, by their nature, 
imprecise.\135\ They can also result in a significant loss of 
comparability among reporting entities. Prescriptive standards, on the 
other hand, can be circumvented more easily by structuring around the 
bright-line requirements of the standard.\136\
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    \133\ See Section 108 Study. Section 108(d) of the Sarbanes-
Oxley Act directed the Commission to conduct a study on the adoption 
by the United States financial reporting system of a principles-
based accounting system.
    \134\ See Section 108 Study.
    \135\ See id.
    \136\ See id.
---------------------------------------------------------------------------

    In the S-K Study, the staff stated that any recommended revisions 
to Regulation S-K should emphasize a principles-based approach as an 
overarching component of the disclosure framework while preserving the 
benefits of a rules-based system, which affords consistency, 
completeness and comparability across registrants.\137\ In assessing 
this recommendation, we recognize the merits and drawbacks of our 
principles-based and prescriptive disclosure requirements.
---------------------------------------------------------------------------

    \137\ See S-K Study at 98.
---------------------------------------------------------------------------

    Limiting prescriptive disclosure requirements and emphasizing 
principles-based disclosure could improve disclosure by reducing the 
amount of information that may be irrelevant, outdated or immaterial. 
Because prescriptive disclosure requirements may result in disclosure 
that is not necessarily material or important to investors, greater use 
of principles-based disclosure requirements may allow registrants to 
more effectively tailor their disclosure to provide only the 
information about their specific business and financial condition that 
is important to investors. A principles-based approach also may allow 
registrants to readily adapt their disclosure to facts and 
circumstances that may change over time.
    On the other hand, reducing prescriptive disclosure requirements 
and shifting towards more principles-based disclosure requirements may 
limit the comparability, consistency and completeness of disclosure. 
Also, in the absence of clear guidelines for determining when 
information is material, registrants may have difficulty applying 
principles-based disclosure requirements,\138\ and the disclosure 
provided may not give investors sufficient insight into how registrants 
apply different principles-based disclosure thresholds. Potentially 
important information that may be disclosed in response to a 
prescriptive disclosure requirement might not be included in response 
to a principles-based disclosure requirement. In the context of 
accounting standards, some have noted practical challenges associated 
with principles-based standards as ``auditors and accountants may be 
less able to predict how regulators or courts will apply these 
principles in particular contexts.'' \139\ Additionally, the use of 
prescriptive disclosure requirements does not prevent registrants from 
including additional, principles-based disclosures that the registrant 
deems important.
---------------------------------------------------------------------------

    \138\ See Financial Reporting Council, Cutting Clutter, 
available at https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Cutting-Clutter-Combating-clutter-in-annual-report.pdf. In this 
report, the Financial Reporting Council, the United Kingdom's 
independent regulator responsible for corporate governance and 
reporting, refers to a ``threshold'' problem, and lists the many 
words used to describe when disclosure is required. The report 
listed the following descriptors triggering disclosure: Critical, 
essential, fundamental, important, key, main, major, primary, 
principal, and significant. Id. The Financial Reporting Council's 
report pertains to the requirements of companies listed in the 
United Kingdom, but there are similarly several disclosure 
``thresholds'' used in Regulation S-K.
    \139\ See C. Coglianese, E. Keating, M. Michael and T. Healey, 
The Role of Government in Corporate Governance, NYU Journal of Law & 
Business 1: 233-251 (2004).
---------------------------------------------------------------------------

    The Section 108 Study proposed a third alternative for developing 
new accounting standards, which the staff referred to as an 
``objectives-oriented'' approach.\140\ Under this approach, standard 
setters would develop new rules by clearly articulating the accounting 
objective of the standard and providing sufficient detail and structure 
so that the standard can be applied on a consistent basis. The staff 
further recommended that such standards should be based on a 
consistently-applied conceptual framework, minimize exceptions and 
avoid the use of bright-line tests.\141\ We are soliciting comment 
below on whether such an approach might be appropriate for business and 
financial disclosures.
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    \140\ See Section 108 Study.
    \141\ See id.
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c. Request for Comment
    6. Should we revise our principles-based rules to use a consistent 
disclosure threshold? If so, should a materiality standard be used or 
should a different standard, such as an ``objectives-oriented'' 
approach or any other approach, be used? If materiality should be used, 
should the current definition be retained? Should we consider a 
different definition of materiality for disclosure purposes? If so, how 
should it be defined?
    7. Should we limit prescriptive disclosure requirements and 
emphasize a principles-based approach? If so, how? How can we most 
effectively balance the benefits of a principles-based approach while 
preserving the benefits of prescriptive requirements?
    8. What are the advantages and disadvantages of a principles-based 
approach? Would a principles-based approach increase the usefulness of 
disclosures? What would be the costs and benefits of such an approach 
for investors and registrants?

[[Page 23928]]

    9. Do registrants find it difficult to apply principles-based 
requirements? Why? If they are uncertain about whether information is 
to be disclosed, do registrants err on the side of including or 
omitting the disclosure? If registrants include disclosure beyond what 
is required, does the additional information obfuscate the information 
that is important to investors? Does it instead provide useful 
information to investors?
    10. Do registrants find quantitative thresholds helpful in 
preparing disclosure? Do such thresholds elicit information that is 
important to investors? Do they require registrants to provide some 
disclosure that investors do not need? To the extent our rules contain 
quantitative thresholds, how should we define them? Are specified 
dollar amounts more or less effective than amounts based on a 
registrant's financial condition, such as a percentage of revenues or 
assets?
    11. Should we develop qualitative thresholds for disclosure? Should 
there be a combination of quantitative and qualitative thresholds?
    12. Do registrants find principles-based disclosure requirements 
helpful in preparing disclosure? Do such requirements elicit 
information that is important to investors?
    13. Would principles-based disclosure affect corporate compliance 
and governance structures? If so, how?
2. Audience for Disclosure
    The Securities Act and the Exchange Act require registrants to 
provide information prescribed by the Commission as necessary or 
appropriate in the public interest or for the protection of 
investors.\142\ The legislative history of the federal securities laws 
speaks broadly to the ``buying public,'' \143\ without addressing 
variation in the needs or sophistication of investors.
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    \142\ See Section 7(a) of the Securities Act [15 U.S.C. 
77g(a)(1)] and Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)].
    \143\ See H.R. Rep. No. 85, 73d Cong., 1st Sess. 4 (1933) 
(broadly referring to the ``public,'' ``buying public'' or 
``investing public'').
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    Nearly fifty years ago, the Wheat Report recognized variation among 
the investor audience for disclosure and suggested that the 
Commission's disclosure requirements should strike a ``pragmatic 
balance . . . between the needs of unsophisticated investors and those 
of the knowledgeable student of finance.'' \144\ The Sommer Report also 
recognized the broad spectrum of investors but recommended that the 
Commission should not expect corporate filings ``to be readily 
understandable in total by uninformed investors.'' \145\ Instead, the 
Sommer Report concluded that the Commission's rules should ``emphasize 
disclosure of information useful to reasonably knowledgeable investors 
willing to make the effort needed to study the disclosures, leaving to 
disseminators the development of simplified formats and summaries 
usable by less experienced and less knowledgeable investors.'' \146\
---------------------------------------------------------------------------

    \144\ Wheat Report at 10.
    \145\ Sommer Report at D-9. See also A.A. Sommer Jr,. The U.S. 
SEC Disclosure Study, 1 U. Pa. J. Int'l L. 145, 148 (1978) (``[T]he 
Committee did not believe that the Commission should design a 
variety of formats and degrees of summarization to serve the diverse 
needs of various investors. It is evident that the sophistication 
and knowledge of investors varies broadly, from the small, 
occasional [investor] through the sophisticated portfolio managers. 
The Committee believed that by having the Commission concentrate on 
the needs of sophisticated investors, the needs of other types of 
investors would be adequately served through the many private 
services which collect, synthesize, summarize and comment upon data 
concerning issuers.'').
    \146\ Sommer Report at D-9. The Advisory Committee on Corporate 
Disclosure identified as information disseminators the 
``organizations commonly thought of as the financial press,'' id. at 
163, that ``condense, summarize and disseminate available 
information and thereby assist analysts and investors in obtaining 
investment decision making information in forms suitable to their 
respective needs and abilities to use it.'' Id. at D-5.
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    When adopting format and content changes to Form 10-K and the 
annual report to security holders as part of integrated disclosure, the 
Commission characterized users of Form 10-K as different from users of 
the annual report to security holders.\147\ Specifically, the 
Commission viewed annual reports to shareholders as readable documents 
designed to be delivered to shareholders \148\ and stated that the 
disclosure requirements in these reports ``evolved in the context of 
shareholders making voting decisions.'' \149\ Meanwhile, the Commission 
noted that Form 10-K was a more technical document,\150\ and the Form 
10-K disclosure was developed for ``investors and other users making 
economic decisions about the company.'' \151\ The Commission further 
noted that the most frequent users of Form 10-K disclosure were 
institutional investors, professional security analysts and 
sophisticated individual investors.
---------------------------------------------------------------------------

    \147\ See Amendments to Annual Report Form, Related Forms, 
Rules, Regulations and Guides; Integration of Securities Act 
Disclosure Systems, Release No. 33-6231, (Sept. 2, 1980) [45 FR 
63630 (Sept. 25, 1980)] (``1980 Form 10-K Adopting Release'').
    \148\ See Proposed Amendments to Annual Report Form; Integration 
of Securities Acts Disclosure Systems, Release No. 33-6176 (Jan. 15, 
1980) [45 FR 5972 (Jan. 24, 1980)] (``1980 Form 10-K Proposing 
Release''). See also 1980 Form 10-K Adopting Release, citing Annual 
Reports--Information Required in Proxy Statement, Release No. 34-
10591 (Jan. 10, 1974) [39 FR 3820 (Jan. 30, 1974)] for the statement 
that ``[t]he annual report to security holders has long been 
recognized as the most effective means of communication between 
management and security holders. Such reports are readable because 
they generally avoid legalistic and technical terminology and 
present information in an understandable, and often innovative, form 
. . . The Commission believes it is in the public interest that all 
security holders be provided with meaningful information regarding 
the business, management, operations and financial position of the 
issuer and that the annual report to security holders is the most 
suitable vehicle presently available for providing this 
information.'' See also Annual Reports, Release No. 34-11079 (Oct. 
31, 1974) [39 FR 40766 (Nov. 20, 1974)] at 40766.
    \149\ 1980 Form 10-K Adopting Release at 63630.
    \150\ See 1980 Form 10-K Proposing Release.
    \151\ 1980 Form 10-K Adopting Release at 63630.
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    In the adopting release for these changes, the Commission stated 
its belief that focusing primarily on these frequent users is 
appropriate in formulating Form 10-K disclosure requirements, but 
``such a focus would not be appropriate in formulating requirements for 
annual reports to security holders.'' \152\ While the Commission 
acknowledged the benefit of uniformity of certain minimum disclosures 
in the annual report to security holders and the Form 10-K, it stated 
that not all disclosure requirements would be identical between the 
Form 10-K and the annual report to security holders, which potentially 
served different purposes and user constituencies.
---------------------------------------------------------------------------

    \152\ Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. Two commenters noted that, in some contexts, customers, 
vendors and competitors of registrants typically understand certain 
disclosures, but that the same information is likely to be less 
meaningful to investors who typically would lack the necessary 
industry-specific knowledge and interest.\153\
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    \153\ See Silicon Valley and M. Liles.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Two commenters discussed the 
profile of the investor contemplated by our disclosure requirements and 
the intended audience for public company disclosures.\154\ Both 
commenters recommended that we should assume that investors using 
registrants' disclosures have some level of sophistication. One of 
these commenters suggested that a contributing factor to increased 
disclosure is the current assumption that the typical investor is a 
novice.\155\ The other commenter

[[Page 23929]]

recommended an empirical study of the audience for financial statements 
and a review of who makes investment decisions and how such decisions 
are made.\156\ This commenter stated that sophisticated investors are 
likely the most appropriate audience for Commission filings, as they 
are generally the investors performing detailed analysis and acting as 
price-makers. This commenter also stated that most of these investors 
do not express concern about the volume of disclosure.
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    \154\ See, e.g., CFA Institute; Shearman.
    \155\ See Shearman (stating ``it seems that disclosure if often 
premised on the assumption that the reasonable investor has little 
or no knowledge of a company's business, its industry or the merits 
or risks associated with its business. We believe that the profile 
of the reasonable investor has devolved to the `neophyte investor' . 
. .'').
    \156\ See CFA Institute.
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    One commenter suggested that current disclosure is too complicated 
for the everyday person to read and that it should be less duplicative 
and more straightforward.\157\ Another commenter noted the diversity of 
the investor community and that the Commission's mandate is to protect 
all investors.\158\ This commenter acknowledged that some disclosures 
may not be useful to retail investors but may be useful to 
institutional investors or vice versa and that in such circumstances, 
disclosure should still be required. This commenter also stated that 
each segment of the investor community is ``entitled to have access to 
all necessary and relevant information.'' Additionally, this commenter 
noted that broad based disclosure improves transparency and builds 
public trust, confidence and understanding of capital markets.
---------------------------------------------------------------------------

    \157\ See letter from Carrie Devorah (Sept. 25, 2015).
    \158\ See letter from the American Federation of Labor and 
Congress of Industrial Organizations (Nov. 20, 2015) (``AFL-CIO'').
---------------------------------------------------------------------------

b. Discussion
    We recognize the diverse composition and varied informational 
needs, sophistication and financial resources of investors and that 
some investors may obtain their analysis or advice from or through 
third parties who use registrant disclosures. Investors using 
registrant disclosure directly may include both individual investors 
and institutional investors, such as banks, insurance companies, mutual 
funds, exchange traded funds, pension funds, hedge funds and managed 
accounts. These investor types may also use registrant disclosure 
indirectly through professional data aggregators, financial advisors, 
proxy advisors, professional analysts, journalists, and other third 
parties who process and synthesize disclosures for end user investors.
    Different investor types and third parties may focus on different 
filings or items of disclosure.\159\ Accordingly, the audience for 
disclosure is an important consideration in determining the means for 
disclosure, and specifically, in which filings or locations certain 
information should be directly provided and where cross-references, 
hyperlinks or incorporating by reference to information elsewhere is 
appropriate.\160\
---------------------------------------------------------------------------

    \159\ See, e.g., 1980 Form 10-K Adopting Release. See also, 
e.g., M. Drake, D. Roulstone, and J. Thornock, The Determinants and 
Consequences of Information Acquisition via EDGAR, 32 Contemp. Acct. 
Res. 1128, at 1128-1161 (2015) (documenting that, of the 9.8 million 
users who directly searched the EDGAR database from 2008 to 2011, 
86% are infrequent users accessing the database less than three 
times a quarter and generally accessing only one filing, although 
there is a small percentage of users accessing EDGAR at least every 
other trading day).
    \160\ For a further discussion of cross-referencing, 
incorporation by reference and hyperlinks, see Sections V.A., V.B., 
and V.C., respectively.
---------------------------------------------------------------------------

    Similarly, as different investors and third parties use disclosure 
in different ways and seek varying degrees of information, the audience 
for disclosure is also an important consideration in determining what 
information is disclosed. Institutional investors, their financial 
advisors and some third parties often use, and have supported requiring 
complex information and interactive data.\161\ These types of investors 
are likely to use disclosures of large numbers of registrants and 
therefore, may be relatively more interested in standardized disclosure 
formats well-suited for large-scale processing and analysis, including 
machine-readable formats.
---------------------------------------------------------------------------

    \161\ See, e.g., CFA Institute, Financial Reporting Disclosures: 
Investor Perspectives on Transparency, Trust, and Volume, July 2013, 
(``CFA Report''), available at https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2013.n12.1; see also Interactive Data Release at 
footnote 98.
---------------------------------------------------------------------------

    Other investors may seek disclosure that emphasizes, within the 
universe of information that is disclosed, the information and analysis 
that management believes is most important.\162\ To the extent some 
investors rely on market prices to efficiently incorporate all public 
information, rather than relying on disclosures directly, it could be 
argued that disclosures should be tailored to those users most likely 
to actively follow a registrant, transact in the registrant's 
securities and set the market price.\163\ Investors in registrants that 
do not have a public trading market for their securities, however, may 
rely more directly on disclosure to evaluate their investments.
---------------------------------------------------------------------------

    \162\ For a discussion of tailoring disclosure to meet the 
diverse or potentially competing needs of the investor audience, see 
SectionV.F.
    \163\ The efficient market theory suggests that under certain 
assumptions, most investors, when making investment decisions, could 
rely on market prices to incorporate all available information. 
According to this theory, most investors would not need to 
individually examine much of the information in disclosures. See, 
e.g., Stephen J. Choi, Company Registration: Towards a Status-Based 
Antifraud Regime, 64 U. Chi. L. Rev. 567, 569-70 (1997); Eugene F. 
Fama, Efficient Capital Markets: A Review of Theory and Empirical 
Work, 25 J. Fin. 383, 383-417 (1970). The Sommer Report stated that 
the efficient market theory is silent as to the optimum amount of 
information required or whether the optimum should be achieved on a 
mandatory or voluntary basis. The Sommer Report also stated that 
market forces alone are insufficient to cause all material 
information to be disclosed. See Sommer Report at D-6. Other studies 
have noted the limitations of the efficient market theory. See, 
e.g., Robert J. Shiller, From Efficient Markets Theory to Behavioral 
Finance, J. Econ. Persp. 83, 83-104 (2003).
---------------------------------------------------------------------------

c. Request for Comment
    14. Should registrants assume some level of investor sophistication 
in preparing their disclosures? If so, what level or levels of 
sophistication? How should investor sophistication be measured? What 
are the risks or other disadvantages to investors if registrants either 
underestimate or overestimate the level of investor sophistication and 
resources when preparing their disclosures? Does disclosure protect all 
investors if it is tailored to a subset of the investor community?
    15. Should we revise our rules to require disclosure that is 
formatted to provide information to various types of investors in a 
manner that will facilitate their use of disclosure for investment and 
voting decisions?
    16. Commenters have suggested that disclosure should be written for 
a more sophisticated investor than current disclosure appears to 
contemplate,\164\ and that tailoring disclosure to less sophisticated 
investors contributes to excessive disclosure.\165\ Should our 
disclosure requirements be revised to address these views? If so, how 
could we revise our disclosure requirements, and which requirements 
should we revise, to encourage more appropriately targeted disclosure? 
If we revised our disclosure requirements to address these views, would 
there be any harm or costs to investors?
---------------------------------------------------------------------------

    \164\ See CFA Institute.
    \165\ See Shearman.
---------------------------------------------------------------------------

    17. How do investors and other users of disclosure currently access 
and use this information? How does this vary across different subsets 
of the audience for the disclosure?
    18. Should we use investor testing, such as focus groups or 
electronic surveys, to provide input on investors' use of and access to 
disclosure?
    19. To what extent should the reliance of certain investors on 
market prices or third-party analyses, rather than using

[[Page 23930]]

disclosure directly, be a factor in determining the type of investor to 
which disclosures should be targeted?
    20. To what extent should we consider the needs of other market 
participants, such as professional securities analysts and other third 
parties, in revising our disclosure requirements? What would be their 
needs?
3. Compliance and Competitive Costs
    When the Commission is engaged in rulemaking it is statutorily 
required to consider, in addition to the protection of investors, 
whether an action will promote efficiency, competition, and capital 
formation.\166\ Disclosure requirements can help reduce information 
asymmetries from management to investors,\167\ improving the allocative 
efficiency of the capital markets and enhancing capital formation by 
lowering the cost of capital.\168\ Lack of information may affect 
investors' willingness to invest and may decrease the allocative 
efficiency of the capital markets. Thus, requiring an appropriate level 
of disclosure is critical to a well-functioning capital market.
---------------------------------------------------------------------------

    \166\ See supra note 6.
    \167\ See Robert Verrecchia, Essays on Disclosure, 32 J. Acct. 
Econ. 91, 91-180 (2001) (demonstrating that a credible commitment to 
disclosure reduces uncertainty and information asymmetries between a 
firm and its investors or among investors).
    \168\ See, e.g., Richard Lambert, Christian Leuz, and Robert E. 
Verrecchia, Accounting Information, Disclosure, and the Cost of 
Capital, 45 J. Acct. Res. 385, 385-420 (May 2007) ; Luzi Hail and 
Christian Leuz, Cost of Capital Effects and Changes in Growth 
Expectations around U.S. Cross-Listings, 93 J. Fin. Econ. 428, 428-
454 (2009). Lambert, Leuz, and Verrecchia (2007) demonstrate 
theoretically that the quality of accounting information can 
influence the cost of capital. Hail and Leuz (2009) find empirical 
evidence that firms, especially firms from countries with weaker 
institutional structures that cross-list securities on U.S. 
exchanges, experience a decrease in their costs of capital.
---------------------------------------------------------------------------

    Disclosure may also have costs to registrants that could negatively 
affect these factors, although advances in technology and 
communications have the potential to reduce these costs. As disclosure 
costs rise, registrants' costs of capital may increase, which can 
reduce investment, lower the value of a company and impede economic 
growth. Registrants may also choose to exit the Commission's reporting 
system, when eligible, or remain private if the disclosure requirements 
are sufficiently costly.\169\
---------------------------------------------------------------------------

    \169\ See Brian J. Bushee & Christian Leuz, Economic 
Consequences of SEC Disclosure Regulation: Evidence from the OTC 
Bulletin Board, 39 J. Acct. Econ. 233, 233-264 (2005). Bushee and 
Leuz find seventy-six percent of firms trading on the OTC Bulletin 
Board (``OTCBB''), many of which tended to be on average 
significantly smaller by market capitalization, left the market 
after the OTCBB eligibility rule required registrants whose 
securities were quoted on the OTCBB to file updated financial 
reports with the Commission or with their banking or insurance 
regulators.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. One commenter stated its belief that ``certain 
Regulation S-K disclosures impose unnecessary costs while not providing 
concomitant value to investors . . . because the original purposes of 
the disclosure requirements have been achieved or are no longer as 
important.'' \170\ Two commenters stated that potential first-time 
registrants evaluate Exchange Act reporting and compliance costs in 
weighing the costs and benefits of an initial public offering.\171\
---------------------------------------------------------------------------

    \170\ See Ernst & Young 1.
    \171\ See Silicon Valley and M. Liles.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Some commenters expressed 
general support for changes in disclosure requirements that would 
reduce costs for registrants while still providing needed information 
to investors.\172\ Other commenters, in making specific 
recommendations, acknowledged compliance costs of these recommendations 
\173\ or suggested ways to minimize the cost of such 
recommendations.\174\ One commenter noted the high cost of regulations, 
especially those promulgated by the Commission.\175\
---------------------------------------------------------------------------

    \172\ See, e.g., letters from Ernst & Young, dated Nov. 20, 2015 
(``Ernst & Young 2''); letter from the Federal Regulation of 
Securities Committee, Business Law Section, American Bar Association 
(Nov. 14, 2014) (``ABA 1''); ABA 2; Business Roundtable; Arthur 
Mboue (Jun 24, 2015); and the Biotechnology Industry Organization 
(July 14, 2015) (``Biotech Industry Organization'').
    \173\ See, e.g., SCSGP at 14 (acknowledging that seeking repeal 
of requirements only a few years after their enactment would impose 
``an additional layer of costs''); ABA 2 (stating that, in its 
review of specific Regulation S-K items, it considered whether 
certain requirements could be better calibrated to provide investors 
with relevant and useful disclosure while balancing compliance costs 
to companies); letter from Allianz Global Investors (Aug. 13, 2015) 
(``Allianz'') (stating that its goal in requesting certain 
additional environmental data is to improve disclosure while 
minimizing any additional reporting burden) and letter from Data 
Transparency Coalition (Oct. 29, 2015) (``Data Transparency 
Coalition'').
    \174\ See letter from Sustainability Accounting Standards Board 
(Nov. 12, 2014) (``SASB'').
    \175\ See A. Radin.
---------------------------------------------------------------------------

b. Discussion
    We are sensitive to the costs of disclosure, including the 
administrative and compliance costs of preparing and disseminating 
disclosure as well as the potential costs of disclosing sensitive 
information to competitors. While the S-K Study did not specifically 
consider costs to investors, the staff identified economic principles 
that should be given consideration when reviewing and considering 
changes to our disclosure requirements, including: (1) The extent to 
which a given disclosure requirement entails high administrative and 
compliance costs; and (2) the extent to which disclosure of a company's 
proprietary information may have competitive or other economic 
costs.\176\
---------------------------------------------------------------------------

    \176\ See S-K Study at 94.
---------------------------------------------------------------------------

    To address the potential negative effects that would result from 
disclosing sensitive information, our rules permit registrants to 
request confidential treatment of proprietary information, if 
disclosure of such information would cause competitive harm to the 
registrant.\177\ The Commission generally does not consider 
confidential treatment to be appropriate for information that is 
necessary for the protection of investors.\178\ If the Commission 
grants a request for confidential treatment, the registrant may redact 
the proprietary information from its public filings.
---------------------------------------------------------------------------

    \177\ Rule 80(b)(4) [17 CFR 200.80(b)(4)] (adopted under the 
Freedom of Information Act [5 U.S.C. 552] (``FOIA'')) (identifying 
as ``nonpublic'' records those that disclose trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential); Securities Act Rule 406 [17 CFR 
230.406]; Exchange Act Rule 24b-2 [17 CFR 240.24b-2] See also 
National Parks and Conservation Association v. Morton, 547 F.2d 673 
(D.C. Cir. 1974) (holding that information is confidential for 
purposes of FOIA if it is of the type not usually released to the 
public and, if released, would cause substantial competitive harm) 
and National Parks and Conservation Association v. Kleppe, 547 F.2d 
673 (D.C. Cir. 1976) (holding that information is confidential if 
its release is likely to cause substantial competitive harm and that 
actual competitive harm need not be shown).
    \178\ Securities Act Rule 406(b)(2)(iii) [17 CFR 
230.406(b)(2)(iii)]. The staff has provided guidance that, except in 
unusual circumstances, disclosure required by Regulation S-K or any 
other applicable disclosure requirement is not an appropriate 
subject for confidential treatment. See Staff Legal Bulletin 1A, 
Confidential Treatment Requests (July 11, 2001) (``Staff Legal 
Bulletin 1A''), available at https://www.sec.gov/interps/legal/slbcf1r.htm.
---------------------------------------------------------------------------

    The Commission also has addressed the costs of disclosure through 
regulatory relief in the form of scaled disclosure requirements for 
certain smaller registrants. These accommodations are intended to 
promote capital formation and provide relief where the fixed costs of 
compliance may be particularly high relative to the size of the company 
while also considering investor protection.\179\
---------------------------------------------------------------------------

    \179\ See, e.g., SRC Adopting Release at 942 (stating that the 
SRC definition ``is appropriately scaled in that it reduces costs to 
smaller companies caused by unnecessary information requirements, 
consistent with investor protection''); Smaller Reporting Company 
Regulatory Relief and Simplification, Release No. 33-8819 (July 5, 
2007) [72 FR 39670 (July 19, 2007)] at 39678 (stating the 
Commission's objective to ``provide maximum flexibility for [SRCs] 
without disadvantaging investors [by] establishing a baseline of 
required disclosure, [while encouraging SRCs] to determine for 
themselves the proper balance and mix of disclosure . . . given the 
costs of compliance and the market demand for information'').

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[[Page 23931]]

    Throughout this concept release, we seek comment on changes to 
specific disclosure requirements that could reduce costs for 
registrants, while still providing investors with information that is 
important or useful to making informed investment and voting decisions. 
Separately, we address the effectiveness of our scaled disclosure 
requirements.\180\ In addition to those discussions, we are interested 
in public comment on other methods we could consider to reduce costs 
for registrants that would not compromise investors' access to 
important information.
---------------------------------------------------------------------------

    \180\ For a discussion of our scaled disclosure requirements, 
see Section IV.H.
---------------------------------------------------------------------------

c. Request for Comment
    21. Do current disclosure requirements appropriately consider the 
costs and benefits of disclosure to registrants and investors? How 
should the Commission evaluate benefits, such as those arising from 
disclosure, that cannot be easily quantified?
    22. In addition to scaled disclosure and confidential treatment, 
are there other accommodations that we could make to reduce costs for 
registrants while still providing investors with the information that 
is important or useful to making informed investment and voting 
decisions?
    23. Are there other benefits and costs that we should consider when 
evaluating disclosure effectiveness?

IV. Information for Investment and Voting Decisions

A. Core Company Business Information

    Disclosure about a registrant's business lays the groundwork for 
understanding and assessing a company, its operations and financial 
condition. Information about a registrant's industry, business 
environment and other factors affecting the business helps inform 
investment and voting decisions by placing other disclosure in context. 
Schedule A of the Securities Act requires disclosure of the general 
character of the business transacted or to be transacted by the 
registrant. Item 101 of Regulation S-K similarly requires a description 
of a registrant's business. Item 102 requires disclosure about a 
registrant's materially important physical properties. We are reviewing 
the disclosure required by Item 101(a)(1) and (c) \181\ and Item 102 of 
Regulation S-K to determine whether they continue to provide investors 
with the information they need to understand the nature of a 
registrant's business and properties. We are seeking public input on 
whether there are any disclosure requirements that should be eliminated 
or modified and whether we should add any new disclosure requirements 
to these Items.
---------------------------------------------------------------------------

    \181\ The staff is separately considering certain aspects of 
Item 101 in developing recommendations for potential changes to 
update or simplify certain disclosure requirements. For a 
description of this project, see supra Section I.
---------------------------------------------------------------------------

1. General Development of Business (Item 101(a)(1))
    Item 101(a) of Regulation S-K requires a description of the general 
development of the business of the registrant during the past five 
years, or such shorter period as the registrant may have been engaged 
in business.\182\ In describing the general development of the 
business, Item 101(a)(1) requires disclosure such as the following: The 
year in which the registrant was organized and its form of 
organization; the nature and results of any bankruptcy, receivership or 
similar proceedings with respect to the registrant or any of its 
significant subsidiaries; the nature and results of any other material 
reclassification, merger or consolidation of the registrant or any of 
its significant subsidiaries; the acquisition or disposition of any 
material amount of assets otherwise than in the ordinary course of 
business; and any material changes in the mode of conducting the 
business.
---------------------------------------------------------------------------

    \182\ 17 CFR 229.101(a)(1). Item 101(a)(1) states information 
shall be disclosed for earlier periods if material to an 
understanding of the general development of the business.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter, as part of a 
general recommendation to limit disclosure requirements asking for the 
same or very similar information on multiple occasions, noted 
redundancies between current reports on Form 8-K and annual reports on 
Form 10-K and recommended that redundant disclosure in reports 
subsequent to disclosure in a Form 8-K should not be required.\183\ For 
example, and as noted by this commenter, Items 1.03 (Bankruptcy or 
Receivership) and 2.01 (Completion of Acquisition or Disposition of 
Assets) of Form 8-K require disclosure similar to the disclosure 
required under Item 101(a)(1). This commenter also recommended making a 
distinction under Item 101(a)(1) for new registrants, which may be 
disclosing the general development of their business for the first time 
in a registration statement, and established reporting registrants, 
which would have disclosed such information in a previous filing.
---------------------------------------------------------------------------

    \183\ See CCMC (also noting redundancies between Item 4.01 of 
Form 8-K (Changes in Registrant's Certifying Accountant) and Item 
304 of Regulation S-K (disclosure of changes in and disagreements 
with accountants) and Item 3.02 of Form 8-K (Unregistered Sales of 
Equity Securities) and Item 701 of Regulation S-K (disclosure of 
recent sales of unregistered securities)).
---------------------------------------------------------------------------

b. Discussion
    A requirement to provide a brief outline of the general development 
of the business for the preceding five years was included in the 
earliest forms of registration statements and annual reports.\184\ The 
first version of Regulation S-K adopted in 1977 included Item 101(a)(1) 
as part of the description of business disclosure requirements.\185\ At 
that time, the Commission amended Item 101(c) to delete a requirement 
to discuss specific business changes during the past three fiscal years 
noting ``[a]ny material changes would be described pursuant to 
paragraph (a) of the item.'' \186\
---------------------------------------------------------------------------

    \184\ See, e.g., Item 6 of Form A-2 adopted in 1935, which 
required registrants to outline briefly ``the general development of 
the business for the preceding five years.'' See Release No. 33-276 
(Jan. 14, 1935) [not published in the Federal Register]. 
Additionally, Item 5 of Form A-1, adopted in 1933, required 
registrants to briefly describe the length of time the registrant 
had been engaged in its business. See Release No. 33-5 (July 6, 
1933) [not published in the Federal Register]. See also S-K Study at 
32, footnote 88.
    \185\ See 1977 Regulation S-K Adopting Release.
    \186\ Id. at 65553. (``The disclosure requirement relating to 
descriptions of products or services has also been amended to delete 
the requirement that changes in the kinds of products produced or 
services rendered or in the markets or methods of distribution 
during the past three fiscal years be discussed. Any material 
changes would be required to be described pursuant to paragraph (a) 
of the item.'').
---------------------------------------------------------------------------

    Business developments and other disclosure called for by Item 
101(a)(1) are often reflected elsewhere in the filing, such as in the 
financial statements or MD&A. Additionally, in 2004, the Commission 
expanded the number of reportable events on Form 8-K to include items 
that may result in disclosure that overlaps with the requirements of 
Item 101(a)(1), such as disclosure of entry into a material definitive 
agreement, including business combination agreements.\187\
---------------------------------------------------------------------------

    \187\ See Additional Form 8-K Disclosure Requirements and 
Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69 
FR 15594 (Mar. 25, 2004)] (``2004 Form 8-K Adopting Release'').
---------------------------------------------------------------------------

c. Request for Comment
    24. Does the current requirement in Item 101(a)(1) to describe the 
general development of a registrant's business during the past five 
years provide useful disclosure that is not available either elsewhere 
in the current filing (e.g., MD&A or the notes to the financial

[[Page 23932]]

statements) or in any prior filing, including current reports on Form 
8-K? Should we require additional or more specific information under 
Item 101(a)(1) and, if so, what type of information and why?
    25. How could we improve Item 101(a)(1)? For example, is the five-
year time frame for this disclosure appropriate? Would a shorter or 
longer time frame be more appropriate? If so, what time frame would be 
appropriate and why?
    26. Does this disclosure continue to be useful for registrants with 
a reporting history? Once a registrant has disclosed this information 
in a registration statement should we allow registrants to omit this 
disclosure from subsequent periodic reports unless material changes 
occur? Alternatively, should we require registrants to describe its 
business as currently conducted as well as any material changes that 
have occurred in the last five years?
    27. Should we revise Item 101(a)(1) to require disclosure of a 
registrant's business strategy? Would investors find such a disclosure 
important or useful? If so, should this requirement be included in a 
registrant's MD&A? Should we define ``business strategy''? If so, how?
    28. Should we permit a summary disclosure of the general 
development of a registrant's business in all filings except the 
initial filing? For example, should we require a more detailed 
discussion of a registrant's business in the initial filing, and in 
subsequent filings only require a summary of the registrant's business 
along with a discussion of material changes in the business as 
previously disclosed in the registrant's Form 10-K? Alternatively, 
should we require a more detailed discussion of a registrant's business 
on a periodic basis, such as every three years, and a summary 
disclosure in other years? Should any such requirement be conditioned 
on timely reporting or some other consideration?
    29. What types of investors or audiences are most likely to value 
the information required by Item 101(a)(1)?
    30. What is the cost of providing the disclosure required by Item 
101(a), including the administrative and compliance costs of preparing 
and disseminating this disclosure? How would these costs change if we 
made any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 101(a).
2. Narrative Description of Business (Item 101(c))
    While Item 101(a) requires disclosure of the general development of 
the business, Item 101(c) requires a narrative description of a 
registrant's business and identifies thirteen specific items that must 
be disclosed: \188\
---------------------------------------------------------------------------

    \188\ 17 CFR 229.101(c). Item 101(c)(1) specifies that, to the 
extent material to an understanding of the registrant's business 
taken as a whole, the description of each segment must include the 
information specified in subsections (i) through (x). Information in 
subsections (xi) to (xiii) is required to be discussed for the 
registrant's business in general; where material, the segments to 
which these matters are significant also must be identified.

    (i) principal products produced and services rendered;
    (ii) new products or segments;
    (iii) sources and availability of raw materials;
    (iv) intellectual property;
    (v) seasonality of the business;
    (vi) working capital practices;
    (vii) dependence on certain customers;
    (viii) dollar amount of backlog orders believed to be firm;
    (ix) business subject to renegotiation or termination of 
government contracts;
    (x) competitive conditions;
    (xi) company-sponsored research and development activities;
    (xii) compliance with environmental laws; and
    (xiii) number of employees.
a. Comments Received
    S-K Study. Two commenters recommended eliminating the requirement 
in Item 101(c) to disclose the amount of backlog orders believed to be 
firm for EGCs, stating the concept of backlog is not a ``meaningful 
metric'' for most of these companies.\189\ These commenters stated that 
eliminating this requirement for EGCs would not ``compromise the 
delivery of meaningful disclosure to investors.'' These commenters also 
raised the question of whether the concept of backlog (or for 
businesses other than industrials, some other measure of committed 
revenue that is not yet reflected in the financial statements) would be 
addressed more appropriately in MD&A. Another commenter recommended 
eliminating disclosure requirements that no longer apply due to market 
or other changes and noted backlog as an example.\190\ This commenter 
recommended eliminating this requirement for all registrants, not only 
EGCs, or moving this requirement to MD&A.
---------------------------------------------------------------------------

    \189\ See Silicon Valley and M. Liles. Item 101(c)(1)(viii) 
requires disclosure of the dollar amount of backlog orders believed 
to be firm, as of a recent date and as of a comparable date in the 
preceding fiscal year, together with an indication of the portion 
thereof not reasonably expected to be filled within the current 
fiscal year, and seasonal or other material aspects of the backlog.
    \190\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. One commenter stated that many 
of the subsections of Item 101(c) would be more appropriately addressed 
elsewhere in the filing, stating that when such information is material 
to a registrant, investors would be better served by having the 
registrant address that information in its MD&A or risk factors.\191\
---------------------------------------------------------------------------

    \191\ See SCSGP (stating that the following subsections of Item 
101 would be more useful if included in MD&A: backlog 
((c)(1)(viii)), working capital practices ((c)(1)(vi)), sources and 
availability of raw materials ((c)(1)(iii)), dependence on certain 
customers ((c)(1)(vii)), competitive conditions ((c)(1)(x)), 
compliance with environmental laws ((c)(1)(xii)) and risks attendant 
to foreign operations ((d)(3))).
---------------------------------------------------------------------------

b. Discussion
    Consistent with Schedule A of the Securities Act, the earliest 
forms of registration statements and annual reports required a brief 
outline of the general character of the business done and intended to 
be done by a registrant.\192\ Many of the disclosure requirements that 
currently appear in Item 101(c) were adopted in 1973 following 
investigation of the hot issues markets.\193\ The adopting release 
notes that, in making investment decisions, venture capitalists and 
underwriters typically obtain specific information from companies about 
their competitive position and the methods of competition in their 
respective industries, and accordingly, the new requirements were 
expected to provide similar information to the investing public.\194\ 
At the same time, the Commission also added requirements for the 
disclosure of the amount of backlog orders, the sources and 
availability of raw materials essential to the business, the number of 
employees and working capital practices.\195\
---------------------------------------------------------------------------

    \192\ See, e.g., Item 5 of Form A-2 adopted in 1935, which 
required registrants to outline briefly ``the general character of 
the business done and intended to be done by the registrant and its 
subsidiaries.'' See Release No. 33-276 (Jan. 14, 1935) [not 
published in the Federal Register]. Additionally, Items 3 through 5 
of Form A-1, adopted in 1933, required registrants to briefly 
describe the ``character of business done or intended to be done,'' 
disclose a list of states where the issuer owned property and was 
qualified to do business, and the length of time the registrant had 
been engaged in its business. See Release No. 33-5 (July 6, 1933) 
[not published in the Federal Register]. See also S-K Study at 32, 
footnote 88.
    \193\ See Hot Issues Adopting Release. See also Hot Issues; 
Meaningful Disclosure, Release No. 33-5274 (July 26, 1972) [37 FR 
16005 (Aug. 9, 1972)].
    \194\ See Hot Issues Adopting Release.
    \195\ See id.
---------------------------------------------------------------------------

    In the S-K Study, the staff recommended reviewing the description 
of business for continuing relevance in

[[Page 23933]]

light of changes that have occurred in the way businesses operate, 
which may make other disclosures relevant that are not expressly 
addressed under current requirements.\196\ As an example, the S-K Study 
noted that requirements could be more specific as to additional 
disclosure that would be necessary where a business relies heavily on 
intellectual property owned by a third party or relies on a service 
agreement with third parties to perform necessary business 
functions.\197\
---------------------------------------------------------------------------

    \196\ See S-K Study at 99-100.
    \197\ Below, and in other parts of this release, we discuss 
other areas where our requirements could be revised to reflect 
changes in the way businesses operate.
---------------------------------------------------------------------------

c. Request for Comment
    31. Do the disclosure requirements in Item 101(c) continue to 
provide useful information to investors? How could we improve Item 
101(c)'s requirements?
    32. How could we update Item 101(c) to better reflect changes in 
the way businesses operate? Are there particular categories or types of 
registrants for which these disclosure requirements are more or less 
relevant?
    33. Are there additional line-item disclosure requirements about a 
registrant's business that would improve the quality and consistency of 
disclosure? Are there any categories of information that certain 
registrants voluntarily provide, and are not required to disclose under 
Item 101(c), that we should include in Item 101(c)? \198\ What would be 
the benefits and challenges of requiring disclosure of additional 
categories of information?
---------------------------------------------------------------------------

    \198\ For example, the staff has observed that many registrants 
provide disclosure about the regulatory environment in which their 
business operates although no specific line-item disclosure 
requirement for this exists.
---------------------------------------------------------------------------

    34. Currently, some registrants include in their business section a 
general description of their industry. Should industry disclosure be a 
separate requirement? If so, would this requirement be more useful to 
investors in the business section or in MD&A?
    35. Should we require additional specific disclosure relevant to 
particular industries, such as manufacturing or technology companies? 
If so, which industries and why? What are the benefits and challenges 
of requiring industry-specific disclosure? \199\
---------------------------------------------------------------------------

    \199\ For a discussion of industry-specific disclosures, see 
Section IV.E.
---------------------------------------------------------------------------

    36. What is the impact on disclosure of listing the thirteen item 
requirements in Item 101(c)? In practice, do registrants view Item 
101(c) as a checklist? Do the prescriptive items result in disclosure 
of information that is not important by some registrants?
    37. Should we require Item 101(c) disclosure only in the initial 
filing with follow-up disclosure of any material changes for subsequent 
years? Should any such requirement be conditioned on timely reporting 
or some other consideration? Should the requirements differ for 
registration statements and periodic reports?
    38. Is there any information currently disclosed in the description 
of business that should be presented in a different context such as 
MD&A or risk factors? Why?
    39. In some circumstances, disclosure is required under Item 
101(c)(1) if material. The item specifies that, to the extent material 
to an understanding of the registrant's business taken as a whole, the 
description of each segment shall include the information in (c)(1)(i) 
through (x) and that matters in (c)(1)(xi) through (xiii) shall be 
discussed for the registrant's business in general; where material, the 
segments to which these matters are significant shall be identified. 
Additionally, some sub-items of Item 101(c)(1) require disclosure if 
material, such as (c)(1)(ii) and (c)(1)(ix),\200\ while others do 
not.\201\ Should we require disclosure of all line items in Item 101(c) 
in all circumstances, regardless of materiality? Why or why not? 
Alternatively, would a principles-based approach to disclosure about a 
registrant's business and operations allow flexibility to disclose 
information that is important to investors? If so, how should such a 
disclosure requirement be structured? What factors should we consider 
in developing such a requirement?
---------------------------------------------------------------------------

    \200\ For example, Item 101(c)(1)(ii) requires a description of 
the status of a product or segment (e.g., whether in the planning 
stage, whether prototypes exist, the degree to which product design 
has progressed or whether further engineering is necessary), if 
there has been a public announcement of, or if the registrant 
otherwise has made public information about, a new product or 
segment that would require the investment of a material amount of 
the assets of the registrant or that otherwise is material. In 
addition, Item 101(c)(1)(ix) requires a description of any material 
portion of the business that may be subject to renegotiation of 
profits or termination of contracts or subcontracts at the election 
of the Government.
    \201\ For example, Item 101(c)(1)(xiii) requires disclosure of 
the number of persons employed by the registrant.
---------------------------------------------------------------------------

    40. What types of investors or audiences are most likely to value 
the information required by Item 101(c)? Would an alternative format or 
presentation of the information improve the value of such disclosure to 
a particular type of investor or audience? If so, what type of format 
or presentation?
    41. What is the cost of providing the disclosure required by Item 
101(c), including the administrative and compliance costs of preparing 
and disseminating this disclosure? How would these costs change if we 
made any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 101(c).
3. Technology and Intellectual Property Rights (Item 101(c)(1)(iv))
    Item 101(c)(1)(iv) requires disclosure of the importance to the 
segment and the duration and effect of all patents, trademarks, 
licenses, franchises and concessions held.\202\
---------------------------------------------------------------------------

    \202\ 17 CFR 229.101(c)(1)(iv).
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None
    Disclosure Effectiveness Initiative. None.
b. Discussion
    A broad range of industries benefit from intellectual property, 
both directly and indirectly,\203\ and intellectual property has become 
increasingly important to business performance.\204\ Certain industries 
produce or use significant amounts of intellectual property or rely 
more heavily on these rights.\205\ Accordingly, certain registrants 
provide detailed disclosure in response to Item 101(c)(1)(iv), and 
disclosure varies among registrants and across industries.
---------------------------------------------------------------------------

    \203\ See Economics and Statistics Administration and United 
States Patent and Trademark Office, Intellectual Property and the 
U.S. Economy: Industries in Focus (March 2012) at iv, available at 
https://www.uspto.gov/sites/default/files/news/publications/IP_Report_March_2012.pdf (``Intellectual Property and the U.S. 
Economy'').
    \204\ See, e.g., Kelvin W. Willoughby, What impact does 
intellectual property have on the business performance of technology 
firms?, Int. J. Intellectual Property Management, Vol. 6, No. 4 
(2013).
    \205\ See Intellectual Property and the U.S. Economy. This 
report identifies seventy-five industries as ``IP-intensive.'' In 
this report, patents, trademarks and copyrights were the categories 
of intellectual property assessed. The methodology for designating 
each of these subcategories as ``IP-intensive'' is outlined further 
in this report. For patent intensive industries, the report utilized 
the North American Industry Classification System (NAICS) codes and 
identified, as the four most patent-intensive industries, those 
industries classified in computer and electronic product 
manufacturing (NAICS 334). This three-digit NAICS industry includes 
computer and peripheral equipment; communications equipment; other 
computer and electronic products; semiconductor and other electronic 
components; and navigational, measuring, electro-medical, and 
control instruments.
---------------------------------------------------------------------------

    In the biotechnology and pharmaceutical industries, registrants 
that provide detailed patent disclosure often disclose the jurisdiction 
in which the patent was filed, year of expiration, type of patent 
(e.g., composition of

[[Page 23934]]

matter, method of use, method of delivery or method of manufacturing), 
products or technologies to which the patent relates and how the patent 
was acquired (e.g., licensed from another entity or owned and filed by 
the registrant). Some registrants in these industries aggregate patent 
disclosure by groups of patents, potentially making disclosure about 
individual material patents difficult to discern. As registrants in the 
biotechnology and pharmaceutical industries regularly sell one or a few 
patented products that generate substantial revenue, disclosure of 
``patent cliffs,'' \206\ which often result in material adverse 
financial effects, may be required in the risk factors section or MD&A.
---------------------------------------------------------------------------

    \206\ The term ``patent cliff'' as used in the biotechnology and 
pharmaceutical industry refers to a future loss of patent protection 
and consequential loss of revenue. These potential future losses are 
known to registrants far in advance of their onset. When they occur, 
they often precipitate material adverse financial effects. See, 
e.g., Andrew Jack, Pharma tries to avoid falling off `patent cliff,' 
Financial Times, May 6, 2012 and Cliffhanger, Economist, Dec. 3, 
2011. See also Ed Silverman, Big Pharma Faces Some Big Patent 
Losses, but Pipelines are Improving, Wall St. J.: L. Blog, available 
at https://blogs.wsj.com/pharmalot/2015/02/09/big-pharma-faces-some-big-patent-losses-but-pipelines-are-improving/.
---------------------------------------------------------------------------

    In the information technologies and services industry, registrants 
protect their intellectual property through the use of patents, 
trademarks, copyrights, trade secrets, licenses and confidentiality 
agreements.\207\ Registrants with large portfolios of intellectual 
property often disclose that their products, services and technologies 
are not dependent on any specific patent, trademark, copyright, trade 
secret or license. As a result, these registrants often provide only 
high-level discussions of their intellectual property portfolios, which 
include general statements of a registrant's development, use and 
protection of its intellectual property. Registrants with smaller 
intellectual property portfolios tend to provide slightly more detailed 
discussions, including, for example, disclosure of their total number 
of issued patents, a range of years during which those patents expire 
and their total number of pending patent applications.
---------------------------------------------------------------------------

    \207\ See Bruce Abramson, Promoting Innovation in the Software 
Industry: A First Principles Approach to Intellectual Property 
Reform, 8 B.U. J. Sci. & Tech. L. 75 (2002) (discussing the software 
industry's use of intellectual property law).
---------------------------------------------------------------------------

    In general, registrants in the information technologies and 
services industry use copyrights to protect against the unauthorized 
copying of software programs \208\ and trade secrets to protect 
proprietary and confidential information that derives its value from 
continued secrecy.\209\ Since Item 101(c)(1)(iv) does not require 
disclosure about copyrights or trade secrets, registrants currently 
make disclosure about such matters voluntarily.
---------------------------------------------------------------------------

    \208\ See Dennis S. Karjala, Copyright Protection of Operating 
Software, Copyright Misuse, and Antitrust, 9 Cornell J.L. & Pub. 
Pol'y 161, 172 (1999) (discussing the dependence of software 
technology companies on copyright).
    \209\ See Raymond T. Nimmer & Patricia Ann Krauthaus, Software 
Copyright: Sliding Scales and Abstracted Expression, 32 Hous. L. 
Rev. 317, 325 (1995) (distinguishing between the software industry's 
use of trade secret law, patent law and copyright law).
---------------------------------------------------------------------------

c. Request for Comment
    42. Should we retain the current scope of Item 101(c)(1)(iv), which 
requires disclosure of a registrant's patents, trademarks, licenses, 
franchises and concessions? Should we expand the rule to include other 
types of intellectual property, such as copyrights? Should we remove 
the individual categories and instead require disclosure of 
``intellectual property''? If so, should we define that term and what 
should it encompass?
    43. What, if any, additional information about a registrant's 
reliance on or use of technology and related intellectual property 
rights should we require and why? Should we revise Item 101(c)(1)(iv) 
to require more detailed intellectual property disclosure, similar to 
the disclosure currently provided by some biotechnology and 
pharmaceutical registrants? If so, should we require such detailed 
disclosures for all or only some of a registrant's intellectual 
property, such as those that are material to the business?
    44. For registrants with large intellectual property portfolios, 
does aggregate disclosure of the total number of patents, trademarks 
and copyrights and a range of expiration dates provide investors with 
sufficient information? If not, what additional information do 
investors need about a company's portfolio of intellectual property? 
Would tabular disclosure or an alternate format or presentation of a 
registrant's intellectual property portfolio make the information more 
useful to investors? What would be the benefits and challenges of 
requiring disclosure of this information in this format?
    45. Should we limit these disclosure requirements to registrants in 
particular industries? If so, which industries should we specify and 
why? Is disclosure about a registrant's intellectual property most 
useful in the context of the description of business, disclosure about 
trends and developments affecting results of operations, or in a 
discussion of risk and risk management?
    46. What are the competitive costs of disclosure under Item 
101(c)(1)(iv)?
4. Government Contracts and Regulation, Including Environmental Laws 
(Items 101(c)(1)(ix) and (c)(1)(xii))
    Item 101(c)(1)(ix) requires disclosure of any material portion of a 
business that may be subject to renegotiation of profits or termination 
of contracts or subcontracts at the election of the government.\210\ 
Item 101(c)(1)(xii) requires disclosure of the material effects of 
compliance with environmental laws on the capital expenditures, 
earnings and competitive position of the registrant and its 
subsidiaries, as well as any material estimated capital expenditures 
for the remainder of the fiscal year, the succeeding fiscal year, and 
such future periods that the registrant deems material.\211\ There is 
no separate line-item requirement to discuss government regulation that 
may be material to a registrant's business.
---------------------------------------------------------------------------

    \210\ 17 CFR 229.101(c)(1)(ix).
    \211\ 17 CFR 229.101(c)(1)(xii).
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested 
including an instruction to Item 101(c)(1)(ix) to specify that, to the 
extent disclosure responsive to this item is included in the notes to 
the financial statements, cross-references should be used to avoid 
duplicative disclosure.\212\ Another commenter stated that registrants 
in the pharmaceutical industry noted that high levels of regulatory 
disclosure and other issues common to all pharmaceutical registrants 
have become commonplace and have detracted from meaningful 
disclosure.\213\ Two commenters sought

[[Page 23935]]

increased disclosure of a registrant's corporate structure and tax 
strategy.\214\ One of these commenters recommended specific disclosures 
such as a list of each country of operation and the name of each entity 
of the issuer group domiciled in each country of operation and the 
total pre-tax gross revenues of each member of the issuer group in each 
country of operation.\215\
---------------------------------------------------------------------------

    \212\ See ABA 2.
    U.S. government contracts generally contain provisions that 
enable the contract to be terminated, in whole or in part, without 
prior notice, at the government's convenience (due to lack of 
funding or for other reasons) or for default based on performance. 
ASC 912-275-50-1 requires footnote disclosure of renegotiation 
uncertainties, their significance, and renegotiation discussions 
relating to the current year. In addition, ASC 912-275-50-6 states 
that if there are indications that a contract termination may occur 
and the termination would have a material effect on the contractor's 
operations, disclosure of the circumstances and the potential 
effects shall be made in the notes to financial statements. The 
staff has observed that, rather than provide duplicative disclosure, 
some government contractors cross-reference their discussion of the 
government's right to terminate a contract under Item 101(c)(1)(ix) 
to either their accounting policy disclosure for revenue recognition 
in the critical accounting estimates disclosure in MD&A or to their 
significant accounting policies in the notes to the financial 
statements.
    \213\ See Shearman.
    \214\ See letter from US SIF and US SIF Foundation (Sept. 18, 
2014) (``US SIF 1'') (stating that a lack of information about a 
registrant's subsidiaries ``prevent investors from accurately 
assessing corporate tax structure and tax strategy and the attendant 
contingent liabilities, as well as exposures to political risks in 
these countries''), and AFL-CIO (``Even minor changes to US or 
foreign tax policy could lead to major changes in the issuer's 
financial performance.'').
    \215\ See AFL-CIO.
---------------------------------------------------------------------------

b. Government Contracts (Item 101(c)(1)(ix))
i. Discussion
    Business contracts with agencies of the U.S. government and the 
various laws and regulations relating to procurement and performance of 
U.S. government contracts impose terms and rights that are different 
from those typically found in commercial contracts. In a 1972 Notice to 
Registrants, the Commission noted that government contracts are subject 
to renegotiation of profit and to termination for the convenience of 
the government.\216\ At any given time in the performance of a 
government contract, an estimate of its profitability is often subject 
not only to additional costs to be incurred but also to the outcome of 
future negotiations or possible claims relating to costs already 
incurred.\217\
---------------------------------------------------------------------------

    \216\ See Defense and Other Long Term Contracts; Prompt and 
Accurate Disclosure of Information, Release No. 33-5263 (June 22, 
1972) [37 FR 21464 (Oct. 11, 1972)].
    \217\ Id.
---------------------------------------------------------------------------

    Registrants with U.S. government contracts tend to disclose that 
the funding of these contracts is subject to the availability of 
Congressional appropriations and that, as a result, long-term 
government contracts are partially funded initially with additional 
funds committed only as Congress makes further appropriations. These 
registrants disclose that they may be required to maintain security 
clearances for facilities and personnel in order to protect classified 
information. Additionally, these registrants state that they may be 
subject to routine government audits and investigations, and any 
deficiencies or illegal activities identified during the audits or 
investigations may result in the forfeiture or suspension of payments 
and civil or criminal penalties.
ii. Request for Comment
    47. Is disclosure about government contracts important to 
investors? Why? Is there any additional information about a 
registrant's contracts with the government that would be important to 
investors?
    48. Rather than focusing specifically on government contracts, 
should we require registrants to briefly describe all material 
contracts? Would such a requirement elicit disclosure not otherwise 
provided in MD&A or the description of business?
c. Compliance with Environmental Laws (Item 101(c)(1)(xii))
i. Discussion
    Pursuant to NEPA, which mandated consideration of the environment 
in regulatory action, the Commission adopted Item 101(c)(1)(xii) in 
1973 to require disclosure of the material effects compliance with 
federal, state and local environmental laws may have on the capital 
expenditures, earnings and competitive position of the registrant.\218\ 
Subsequent litigation concerning both the denial of a rulemaking 
petition and adoption of the 1973 environmental disclosure requirements 
resulted in the Commission initiating public proceedings in 1975 
primarily to elicit comments on whether the provisions of NEPA required 
further rulemaking.\219\ As a result of these proceedings, the 
Commission in 1976 amended the requirements to specifically require 
disclosure of any material estimated capital expenditures for 
environmental control facilities for the remainder of the registrant's 
current and succeeding fiscal years, and for any further periods that 
are deemed material.\220\
---------------------------------------------------------------------------

    \218\ See supra note 61.
    \219\ See Notice of Public Proceedings on Environmental 
Disclosure Release.
    \220\ See 1976 Environmental Release.
---------------------------------------------------------------------------

ii. Request for Comment
    49. Should we increase or reduce the environmental disclosure 
required by Item 101(c)(1)(xii)? Why? What kind of information should 
we add to or remove from this requirement?
    50. Is disclosure about the material effects that compliance with 
provisions regulating the discharge of materials into the environment, 
or otherwise relating to the protection of the environment, may have 
upon a registrant's capital expenditures, earnings and competitive 
position important to investors? If so, should we require registrants 
to present this disclosure in a specific format? Would this disclosure 
be more appropriate in MD&A or the business section?
    51. Should we require specific disclosure about the material 
effects that other regulations may have on a registrant's capital 
expenditures, earnings and competitive position? If so, are there 
specific laws and regulations that our rules should cover?
d. Government Regulation
i. Discussion
    Although not referenced in Item 101, many registrants discuss 
government regulations relevant to their business.\221\ Healthcare and 
insurance providers regularly disclose the registrant's collection, use 
and protection of individually-identifiable information and its 
compliance with the Health Insurance Portability and Accountability Act 
of 1996,\222\ as well as the impact of the Patient Protection and 
Affordable Care Act \223\ on its business. Biotechnology or medical 
device companies often disclose the status of and process for FDA 
approval of significant new drugs or medical devices. Public utilities 
typically discuss regulation by various federal, state and local 
authorities and include information about state ratemaking procedures, 
which determine the rates utilities charge and the return on invested 
capital they earn.
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    \221\ However, the disclosure requirements applicable to SRCs do 
require some of this information, to the extent material. Item 
101(h)(4)(viii) requires disclosure of the need for any government 
approval of principal products or services. If government approval 
is necessary and the SRC has not yet received that approval, SRCs 
are required to discuss the status of the approval within the 
government approval process. The staff has observed that 
biotechnology or medical device companies that are not SRCs also 
provide this disclosure. Additionally, Item 101(h)(4)(ix) requires 
disclosure of the effect of existing or probable governmental 
regulations on the business. For a discussion of scaled disclosure 
requirements, see Section IV.H.2.
    \222\ Public Law 104-191, 110 Stat. 1936 (1996).
    \223\ Public Law 111-148, 124 Stat. 119 (2010).
---------------------------------------------------------------------------

    Registrants in the financial services industry regularly describe 
federal and state regulation as well as supervision by the Federal 
Reserve Board, while registrants with a material amount of U.S. 
government contracts disclose the laws and regulations for government 
contracts. Registrants with tax strategies involving foreign 
jurisdictions typically disclose that they are subject to income taxes 
in both the U.S. and numerous foreign jurisdictions, and that future 
changes to U.S. and non-U.S. tax law could adversely affect their 
anticipated financial position and results. Some disclose the impact on 
their business of tax treaties between the U.S. and one or more foreign 
jurisdictions.

[[Page 23936]]

ii. Request for Comment
    52. Given that many registrants provide disclosure of material 
government regulations without a specific line-item requirement, are 
the current disclosure requirements sufficient? Would a specific 
requirement seeking this disclosure provide additional information that 
is important to investors? If so, what specific information and level 
of detail should we require and why? What would be the costs of 
requiring disclosure of this information?
    53. Foreign regulations, including foreign tax rates and treaties, 
may have a material impact on a registrant's operations. Should we 
specifically require registrants to describe foreign regulations that 
affect their business? If so, what specific information and level of 
detail should we require? How would any additional information inform 
investment and voting decisions? Would there be challenges for 
registrants to provide such disclosure?
5. Number of Employees (Item 101(c)(1)(xiii))
    Item 101(c)(1)(xiii) requires disclosure of the number of persons 
employed by the registrant. The Division of Corporation Finance 
(``Division'') has provided interpretive guidance on this requirement 
stating that, in industries where the general practice is to hire 
independent contractors rather than employees, companies should 
disclose the number of persons retained as independent contractors as 
well as the number of regular employees.\224\
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    \224\ See Regulation S-K Compliance and Disclosure 
Interpretations Question 203.01, available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested 
requiring disclosure of the number of employees for each of a 
registrant's subsidiaries along with other information about the 
subsidiaries, to provide investors with the information necessary to 
understand the structure of the registrant and its international 
strategy.\225\ This commenter stated that disclosure of a subsidiary in 
a known tax haven with ``zero employees and billions in profits, for 
example, would signal to investors the use of a particularly aggressive 
and potentially risky strategy to hide profits from regulators.''
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    \225\ See US SIF 1.
---------------------------------------------------------------------------

b. Discussion
    The number of persons employed by the registrant can help investors 
assess the size and scale of a registrant's operations. Changes in the 
number or type of persons employed can also be indicative of trends or 
shifts in a registrant's operations. Disclosure of the number of 
employees varies among registrants. Some registrants distinguish 
between the number of full-time and part-time employees, and others 
specify the number of employees in each department or division. 
Registrants with large numbers of employees often disclose the 
approximate number of employees and discuss their employees' membership 
in a union or similar organization. Other registrants characterize the 
state of their employee relations and disclose whether their employees 
are covered by a collective bargaining agreement or represented by a 
labor union.
c. Request for Comment
    54. Does disclosure of the number of persons employed by the 
registrant help investors assess the size, scale and viability of a 
registrant's operations and any trends or shifts in operations? Is this 
disclosure important to investors and why? Is there any additional 
information about employees that would be important to investors? If 
so, what information?
    55. For new registrants filing a registration statement that have 
not had revenue from operations during each of the preceding three 
fiscal years, Item 101(a)(2)(iii) requires disclosure of any 
anticipated material changes in the number of employees in the various 
departments such as research and development, production, sales or 
administration.\226\ Is this information useful to investors? Should we 
include a similar requirement for all registrants in periodic and 
current reports? Should this requirement be in addition to or in lieu 
of the current requirement to disclose the number of employees?
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    \226\ Item 101(a)(2) applies to registrants filing a 
registration statement on Form S-1 or Form 10 that are not subject 
to Sections 13(a) or 15(d) of the Exchange Act and have not received 
revenue from operations during each of the three fiscal years 
immediately before the filing of such registration statement.
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    56. Should we require registrants to distinguish among their total 
number of persons employed, such as by distinguishing between:
     Full-time and part-time or seasonal employees;
     Employees and independent contractors; or
     Domestic and foreign employees?
    Why or why not?
    57. Rather than requiring registrants to disclose the number of 
employees or independent contractors, should we require or permit 
registrants to provide a range? Why? Should we allow for different 
ranges based on the size of the registrant? Would reporting a range 
rather than a specific number reduce the costs of producing this 
disclosure?
    58. Should we require disclosure of additional information about a 
registrant's employees or employment practices? What would be the 
challenges of requiring disclosure of any additional information, and 
what would be the benefits to investors?
    59. As outsourcing and subcontracting have become more prevalent in 
the last few decades,\227\ what, if any, additional information about a 
registrant's outsourcing or subcontracting arrangements should we 
require? Would this information be most useful in the context of the 
description of the registrant's business, disclosure about trends and 
developments affecting results of operations, or in a discussion of 
risk and risk management? What would be the challenges of requiring 
disclosure of this information?
---------------------------------------------------------------------------

    \227\ See, e.g., Deloitte, Deloitte's 2014 Global Outsourcing 
and Insourcing Survey (2014), available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-2014-global-outsourcing-insourcing-survey-report-123114.pdf (noting a 
significant rise in offshoring in the last two decades but also a 
small but growing reversal where companies that had previously 
offshored functions are bringing them back to their home country); 
Here, there and everywhere, Economist, Jan. 19, 2013 (discussing 
offshoring trends in the last several decades, but also noting such 
trends are ``maturing, tailing off and to some extent being 
reversed'').
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6. Description of Property (Item 102)
    Item 102 of Regulation S-K requires disclosure of the location and 
general character of the principal plants, mines and other materially 
important physical properties of the registrant and its subsidiaries. 
Item 102 also requires registrants to identify the segments, as 
reported in the financial statements, that use the properties 
described. Instruction 1 states that registrants must disclose such 
information as reasonably will inform investors as to the suitability, 
adequacy, productive capacity and extent of utilization of the 
facilities by the registrant.\228\ Instruction 2 provides that, in 
determining whether properties should be described, registrants should 
take into account both quantitative and qualitative factors.\229\
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    \228\ Detailed descriptions of the physical characteristics of 
individual properties or legal descriptions by metes and bounds are 
not required. See Instruction 1 to Item 102.
    \229\ Disclosure specific to the mining industry in Item 102--
Instructions 3, 5 and 7 refer to the mining industry--is outside of 
the scope of this release. Commission staff is undertaking a 
separate review of disclosure requirements for mining activities. 
Instructions 4, 6 and 8 apply to the oil and gas industry. 
Disclosure specific to the oil and gas industry was considered in 
2008 and is also outside of the scope of this release. See Oil and 
Gas Release. Instruction 9 applies to the real estate industry. For 
a general discussion of Industry Guides, see Section IV.E.

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[[Page 23937]]

a. Comments Received
    S-K Study. One commenter recommended that property disclosure 
should not be required for entities where physical plant or properties 
are not a significant element of enterprise value.\230\
---------------------------------------------------------------------------

    \230\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Two commenters noted that if 
material to a registrant's business, MD&A would require a discussion of 
the importance of a property or facility and, in these instances, Item 
102 may result in immaterial or duplicative disclosure.\231\ One 
commenter recommended eliminating Item 102 disclosure, stating that 
disclosure of physical properties does not, in most cases, provide 
investors meaningful information, particularly for registrants not 
engaged in manufacturing.\232\ Another commenter cautioned against 
disclosing only material properties and eliminating requirements to 
list locations, capacity and ownership.\233\ This commenter stated that 
investors need a complete understanding of the scope of a registrant's 
operations and assets in order to evaluate the scope of its risks and 
opportunities. One commenter noted different triggers for disclosure in 
Item 102 such as the item's reference to ``materially'' important 
physical properties and ``major'' encumbrance. This commenter 
recommended a Commission study to determine whether these varied 
formulations should be harmonized to lessen ambiguity on their 
application.\234\
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    \231\ See CCMC; SCSGP.
    \232\ See Shearman.
    \233\ See US SIF 1.
    \234\ See ABA 2.
---------------------------------------------------------------------------

b. Discussion
    Since 1935, we have required disclosure similar to that required 
under Item 102.\235\ The predecessor to Item 102 called for a brief 
description of the general character and location of ``principal plants 
and other important units'' of the registrant and its subsidiaries and, 
for property not held in fee, a description of how the property was 
held.\236\ In 1977, a similar requirement was one of two original 
requirements in Regulation S-K and additionally, required registrants 
to identify the segments that use the properties described.\237\
---------------------------------------------------------------------------

    \235\ See Release No. 33-276 (January 14, 1935) [not published 
in the Federal Register].
    \236\ Id.
    \237\ See 1977 Regulation S-K Adopting Release.
---------------------------------------------------------------------------

    In 1996, the Task Force on Disclosure Simplification recommended 
the Commission revise Item 102 to more effectively elicit disclosure of 
material facts about a registrant's principal properties, rather than 
lists of properties and their immaterial characteristics.\238\ The S-K 
Study recommended reviewing Item 102 for continuing relevance given 
that many businesses no longer require or depend on physical 
locations.\239\ For businesses that do have material properties, the S-
K Study suggested refocusing disclosure on the significance of the 
property to the business and any trends or uncertainties in connection 
with that property, rather than requiring a list of locations, capacity 
and ownership.\240\
---------------------------------------------------------------------------

    \238\ See Task Force Report.
    \239\ See S-K Study at 99-100.
    \240\ See id.
---------------------------------------------------------------------------

    In response to Item 102, registrants typically disclose information 
about their headquarters such as the location, size and whether they 
own or lease the property, as well as information about other 
properties material to the business. In addition to this disclosure, 
some registrants cross-reference to the discussion in the notes to the 
financial statements such as to the note on purchase and lease 
commitments or to the note on property, plant and equipment.
    Registrants in certain industries may provide more specific 
disclosures. For example, registrants with retail stores often disclose 
the number of their stores, location, size and lease termination dates. 
Registrants in the hotel and lodging industry tend to disclose the 
location and number of rooms at each of their properties. Some 
registrants with casino operations disclose the number of table games 
and slot machines at each location. Registrants in the restaurant 
industry tend to disclose the number of their restaurants, location and 
whether they are registrant-operated or franchisee-operated stores. In 
the paper mill or paper production industry, registrants typically 
provide tabular disclosure for facilities including their geographic 
location and related products or use. By contrast, some registrants, 
such as those that provide services or information technology, may not 
have material physical properties and tend to disclose information 
about their corporate headquarters, office space and other facilities.
c. Request for Comment
    60. Should we retain or eliminate Item 102? Why or why not? How 
could Item 102 be improved?
    61. Would any additional disclosure about a registrant's properties 
be important to investors? If so, what additional disclosure would be 
important? What would be the challenges to registrants of requiring 
disclosure of any such additional information, and what would be the 
benefits to investors?
    62. For registrants that may not have material physical properties, 
is the disclosure that registrants typically provide about their 
corporate headquarters, office space and other facilities important to 
investors?
    63. Should we require property disclosure only for registrants in 
certain industries? If so, how should we identify these industries?
    64. Should the disclosure requirements focus instead on the risks 
to a registrant's business resulting from the availability and cost of 
properties it needs for its operations?
    65. What types of investors or audiences are most likely to value 
the information required by Item 102?
    66. What is the cost of providing the disclosure required by Item 
102, including the administrative and compliance costs of preparing and 
disseminating this disclosure? How would these costs change if we made 
any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 102.

B. Company Performance, Financial Information and Future Prospects

    Financial information is essential to understanding a registrant's 
performance, financial condition and future prospects. The Commission 
has long recognized the need for a narrative explanation of the 
financial statements, as a numerical presentation and accompanying 
footnotes alone may be insufficient for an investor to assess the 
quality of the earnings and the likelihood that past performance is 
indicative of future performance.\241\
---------------------------------------------------------------------------

    \241\ See, e.g., 1989 MD&A Interpretive Release.
---------------------------------------------------------------------------

    Regulation S-X requires companies to provide annual and quarterly 
financial statements,\242\ while several items in Regulation S-K 
require additional disclosure about a registrant's financial condition 
and results of operations:
---------------------------------------------------------------------------

    \242\ Articles 3, 8 and 10 of Regulation S-X [17 CFR 210.3, 
210.8 and 210.10].
---------------------------------------------------------------------------

     Item 301 requires disclosure of selected financial data;

[[Page 23938]]

     Item 302(a) requires disclosure of selected quarterly 
financial data; \243\ and
---------------------------------------------------------------------------

    \243\ The staff is separately considering Item 302(b), which 
requires certain disclosures of oil and gas activities, as part of 
its work to develop recommendations for the Commission for potential 
changes to update or simplify certain disclosure requirements. For a 
description of this project, see Section I.
---------------------------------------------------------------------------

     Item 303 requires disclosure of management's discussion 
and analysis of financial condition and results of operations.
    We are reviewing these disclosure requirements to determine whether 
they continue to provide investors with information that is important 
to evaluating a registrant's performance, financial condition and 
prospects for the future and what, if any, aspects of the disclosure 
requirements are duplicative. We are seeking public input on whether we 
should consider any new disclosure requirements and whether we should 
eliminate or modify any existing disclosure requirement related to such 
matters.
1. Selected Financial Data (Item 301)
    Item 301 requires registrants to disclose selected financial data 
that highlight significant trends in the registrant's financial 
condition and results of operations.\244\ Disclosure must be provided 
in comparative columnar form for each of the registrant's last five 
fiscal years and any additional fiscal years necessary to keep the 
information from being misleading. Instruction 2 to Item 301 lists 
specific items that must be included, subject to appropriate variation 
to conform to the nature of the registrant's business, and provides 
that registrants may include additional items they believe would 
enhance an understanding of and would highlight other trends in their 
financial condition and results of operations.\245\ Registrants must 
include selected financial data in their annual reports but this is not 
a requirement for quarterly reports.
---------------------------------------------------------------------------

    \244\ Item 301 of Regulation S-K [17 CFR 229.301].
    \245\ Instruction 2 to Item 301 of Regulation S-K lists the 
following items that must be included in the table of financial 
data: net sales or operating revenues; income (loss) from continuing 
operations; income (loss) from continuing operations per common 
share; total assets; long-term obligations and redeemable preferred 
stock (including long-term debt, capital leases, and redeemable 
preferred stock); and cash dividends declared per common share.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. Two commenters suggested 
eliminating Item 301.\246\ One of these commenters noted that readers 
can discern trends from a registrant's financial statements and 
MD&A,\247\ while the other commenter stated the information required by 
this item can be readily obtained from sources other than Commission 
filings.\248\
---------------------------------------------------------------------------

    \246\ See Shearman; SCSGP.
    \247\ See Shearman.
    \248\ See SCSGP.
---------------------------------------------------------------------------

    Two commenters suggested revising Item 301 to allow registrants to 
omit the earliest two of the last five fiscal years where the 
information cannot be provided without unreasonable cost or 
expense.\249\ One of these commenters suggested limiting the required 
disclosure to the last three fiscal years, unless all five years are 
necessary to illustrate a material trend in the registrant's 
business.\250\ The other commenter also noted challenges to registrants 
in recasting annual periods prior to those presented in the financial 
statements to reflect a retrospective accounting change and suggested 
allowing registrants to present a retrospective accounting change only 
for the periods presented in the financial statements if the earlier 
periods cannot be recast without unreasonable effort and cost.\251\ To 
inform investors why this information is unavailable, this commenter 
suggested ``clear disclosure about the unreasonable effort'' that would 
be required to recast these earliest periods.\252\
---------------------------------------------------------------------------

    \249\ See ABA 2 (stating this accommodation should be allowed 
where the information is unavailable or not obtainable without 
unreasonable cost or expense as long as information (qualitative 
and, if reasonably available without unreasonable cost or expense, 
quantitative) about a material trend is otherwise provided for such 
two fiscal years) and Ernst & Young 2 (noting Item 3.A of Form 20-F 
provides this accommodation for foreign private issuers and that 
EGCs are also allowed a similar accommodation).
    \250\ See ABA 2.
    \251\ See Ernst & Young 2.
    \252\ Id.
---------------------------------------------------------------------------

b. Five-Year Trend Data (Instruction 1)
i. Discussion
    Item 301 is intended to provide selected financial data in a 
convenient and readable format that highlights significant trends in 
the registrant's financial condition and results of operations.\253\ In 
adopting this requirement, the Commission stated that Item 301 was 
relevant primarily where it related to trends in the registrant's 
continuing operations.\254\ When adopted, this item replaced a previous 
requirement that called for a summary of operations.\255\
---------------------------------------------------------------------------

    \253\ Instruction 1 to Item 301 [17 CFR 229.301]. See also 1980 
Form 10-K Adopting Release.
    \254\ See 1980 Form 10-K Adopting Release. See also 1980 Form 
10-K Proposing Release.
    \255\ See 1980 Form 10-K Adopting Release. While the item in its 
current form was not adopted until 1980, the concept of providing a 
five-year presentation of certain significant line items was 
suggested as early as 1967. See Wheat Report at 338-39 (recommending 
that the Commission require registrants to provide a five-year 
earnings summary annually).
    In October 1970, the Commission expanded Form 10-K to include 
``Item 2--Summary of Operations,'' which required registrants to 
furnish in comparative columnar form a five-year summary of 
operations and any additional fiscal years necessary to keep the 
summary from being misleading. See Annual Reports by Certain 
Companies Having Registered Securities, Release No. 34-9000 (Oct. 
21, 1970) [35 FR 16919 (Nov. 3, 1970)] (``1970 Revised Form 10-K 
Adopting Release'').
---------------------------------------------------------------------------

    Most of the items required by Item 301 are also required in the 
annual financial statements. Unlike the financial statements required 
in a Form 10-K, however, Item 301 information covers each of the 
registrant's last five fiscal years. Accordingly, Item 301 disclosure 
for items such as net sales and income or loss from continuing 
operations in the income statement \256\ and total assets and 
redeemable preferred stock in the balance sheets,\257\ overlaps with 
disclosure in the financial statements for the most recent three and 
two years, respectively.\258\
---------------------------------------------------------------------------

    \256\ Rule 5-03 of Regulation S-X [17 CFR 210.5-03].
    \257\ Rule 5-02 of Regulation S-X [17 CFR 210.5-02].
    \258\ SRCs are not subject to the requirements of Item 301. Item 
301(c) of Regulation S-K [17 CFR 229.301(c)].
---------------------------------------------------------------------------

    Earlier years required to be disclosed under Item 301 are typically 
available in prior annual reports. When the precursor to Item 301 was 
adopted in 1970, prior annual reports were not readily accessible.\259\ 
Today, these reports can be readily accessed through EDGAR and other 
public sources, including company Web sites.
---------------------------------------------------------------------------

    \259\ Before adopting the precursor to Item 301, the Commission 
implemented a microfiche system in 1968 that supplemented its hard 
copy reproduction service and was intended to ``facilitate wider, 
more economical and more rapid distribution'' of Exchange Act 
reports. See Wheat Report at 313.
---------------------------------------------------------------------------

    Despite some overlap with current and prior financial statements, 
Item 301 disclosure can provide information that might not be available 
to investors for all five years. Specifically, retrospective changes to 
the annual financial statements would typically be reflected in the 
selected financial data table across all five years instead of the 
three years covered in the financial statements.\260\ For example, a 
registrant that retrospectively revises its annual financial statements 
to reflect discontinued operations typically may need to consider 
whether it should adjust years four and five in its selected financial 
data table in addition to the three most recent years covered in the 
annual audited financial statements.

[[Page 23939]]

Item 301 disclosure reflecting the discontinued operations for these 
earlier two years would not be available in either the current or prior 
financial statements.
---------------------------------------------------------------------------

    \260\ See Division of Corporation Finance Financial Reporting 
Manual, Section 1610.1.
---------------------------------------------------------------------------

ii. Request for Comment
    67. Is the Item 301 disclosure that is not otherwise available or 
readily accessible important to investors? Are there benefits to having 
the five-year information in one table?
    68. Should we retain, modify or eliminate Item 301? Why? Does it 
achieve the goal of highlighting significant trends in a registrant's 
financial condition and results of operation? Does it also achieve the 
goal of providing selected financial data in a convenient and readable 
format? How would the elimination of Item 301 affect investors? Would 
elimination of this requirement increase costs to investors because 
they would then need to obtain this information from prior filings?
    69. If we retain Item 301, should we modify this requirement and, 
if so, how? Should we modify the item to require additional disclosure 
and, if so, what additional disclosure would be important to investors 
and why?
    70. Instruction 1 to Item 303(a) specifies that, where trend 
information is relevant, reference to the five-year selected financial 
data pursuant to Item 301 may be necessary.\261\ Despite this 
instruction, registrants generally do not discuss or analyze trends 
outside the three-year timeframe of Item 303. Does selected financial 
data effectively highlight significant trends that are not described 
elsewhere? If so, is five years an appropriate period or should we 
modify the number of fiscal years required to be included in the 
selected financial data? If selected financial data does not 
effectively highlight significant trends that are not described 
elsewhere, how could we modify our requirements to best achieve the 
objective of highlighting significant trends in registrants' financial 
condition and results of continuing operations?
---------------------------------------------------------------------------

    \261\ Instruction 1 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)].
---------------------------------------------------------------------------

    71. EGCs are not required to present selected financial data for 
any period prior to the earliest audited period presented in connection 
with its first effective registration statement.\262\ Should we revise 
Item 301 to provide a similar accommodation for all registrants? Why or 
why not?
---------------------------------------------------------------------------

    \262\ Public Law 112-106, Sec. 102, 126 Stat. 306 (2012).
---------------------------------------------------------------------------

    72. Should we require Item 301 disclosure for the full five years 
only in certain instances such as when a registrant revises its annual 
financial statements or if information on the earliest two of the last 
five years is available without unreasonable cost or expense?
    73. Currently, Item 301 disclosure is required in comparative 
columnar form. If we continued to require this disclosure, should we 
consider other presentation or format requirements?
    74. What types of investors or audiences are most likely to value 
the information required by Item 301?
    75. What is the cost of providing the disclosure required by Item 
301, including the administrative and compliance costs of preparing and 
disseminating this disclosure? How would these costs change if we made 
any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 301.
c. Items Included in Selected Financial Data (Instruction 2)
i. Discussion
    When proposing the requirement for selected financial data, the 
Commission sought to strike a reasonable balance between specified 
content and a flexible approach that permits registrants to select the 
data that best indicates performance.\263\ The Commission noted that 
commenters requested increased flexibility in the form and content of 
this disclosure in response to an advanced notice of proposed 
rulemaking.\264\ Accordingly, while Instruction 2 to Item 301, as 
adopted, contains prescriptive requirements, such as disclosure of 
total assets and income (loss) from continuing operations, it also 
permits registrants the flexibility to include additional items they 
believe would enhance an understanding of and would highlight other 
trends in their financial condition and results of operations.\265\
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    \263\ See 1980 Form 10-K Proposing Release.
    \264\ See 1980 Form 10-K Proposing Release; see also Annual 
Report Form, Release No. 34-15068 (Aug. 16, 1978) [43 FR 37460 (Aug. 
23, 1978)].
    \265\ Instruction 2 to Item 301 of Regulation S-K [17 CFR 
229.301].
---------------------------------------------------------------------------

    For registrants that provide additional items in their selected 
financial data, disclosure varies. Financial institutions commonly 
provide additional metrics that may include return on average assets 
and capital ratios. Registrants in the telecommunications industry may 
include the number of subscribers while retailers may include the 
number of stores or average store size. While such information is not 
required under U.S. GAAP, it is not considered a ``non-GAAP financial 
measure'' such that reconciliation under Item 10(e) of Regulation S-K 
would be required.\266\ Additionally, some registrants include non-GAAP 
financial measures in their Item 301 disclosures.
---------------------------------------------------------------------------

    \266\ Item 10(e)(4) states that, for purposes of paragraph (e), 
non-GAAP financial measures exclude operating and other statistical 
measures; and ratios or statistical measures calculated using 
exclusively one or both of (i) financial measures calculated in 
accordance with GAAP, and (ii) operating measures or other measures 
that are not non-GAAP financial measures. [17 CFR 229.10(e)(4)]. See 
also Conditions for Use of Non-GAAP Financial Measures, Release No. 
33-8176 (Jan. 22, 2003) [68 FR 4819 (Jan. 30, 2003)] (``Non-GAAP 
Measures Release'') (stating that operating and other statistical 
measures such as unit sales, numbers of employees, numbers of 
subscribers, or numbers of advertisers are not non-GAAP financial 
measures).
---------------------------------------------------------------------------

ii. Request for Comment
    76. Does Instruction 2 provide a reasonable balance between 
specified content and a flexible approach that permits registrants to 
select the data that best indicates performance? Why or why not? If 
not, how should we modify Instruction 2? For example, should we modify 
Instruction 2 to be more prescriptive or provide for a more flexible 
approach? If a flexible approach should be used, should we require 
registrants to disclose their reasons for the items it included?
    77. Should we require auditor involvement (e.g., audit, review or 
specified procedures) for this disclosure, and if so, what should the 
nature of the involvement be? What would be the benefits and costs to 
registrants and to investors?
    78. What is the impact of listing specific items of disclosure in 
Instruction 2? Do registrants view the items listed in Instruction 2 as 
a checklist? Should additional items be considered?
2. Supplementary Financial Information (Item 302)
    Item 302(a)(1) requires certain registrants to disclose quarterly 
financial data of selected operating results \267\ and Item 302(a)(2) 
requires

[[Page 23940]]

disclosure of variances in these results from amounts previously 
reported.\268\ Registrants must provide quarterly information for each 
full quarter within the two most recent fiscal years and any subsequent 
period for which financial statements are included or required by 
Article 3 of Regulation S-X. Under Item 302(a)(3), registrants must 
describe the effect of any disposals of segments of a business and 
extraordinary, unusual or infrequently occurring items recognized in 
each quarter, as well as the aggregate effect and the nature of year-
end or other adjustments that are material to the results of that 
quarter.\269\ If a registrant's financial statements have been reported 
on by an accountant, Item 302(a)(4) requires that accountant to follow 
appropriate professional standards and procedures regarding the data 
required by Item 302(a).\270\
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    \267\ Item 302(a)(1) of Regulation S-K [17 CFR 229.302(a)(1)]. 
Item 302(a)(1) specifies disclosure of net sales, gross profit (net 
sales less costs and expenses associated directly with or allocated 
to products sold or services rendered), income (loss) before 
extraordinary items and cumulative effect of a change in accounting, 
per share data based upon such income (loss), net income (loss) and 
net income (loss) attributable to the registrant, for each full 
quarter within the two most recent fiscal years and any subsequent 
interim period for which financial statements are included or are 
required to be included by Article 3 of Regulation S-X.
    The staff is separately considering Item 302(b), which requires 
certain disclosures of oil and gas activities, as part of its work 
to develop recommendations for the Commission for potential changes 
to update or simplify certain disclosure requirements. For a 
description of this project, see Section 0.
    \268\ Item 302(a)(2) of Regulation S-K [17 CFR 229.302(a)(2)]. 
When disclosure in Item 302(a) varies from amounts previously 
reported on the Form 10-Q filed for any quarter, such as if a 
combination between entities under common control occurs or where an 
error is corrected, the registrant must disclose a reconciliation of 
the amounts given with those previously reported and describe the 
reason for the difference.
    \269\ Item 302(a)(3) of Regulation S-K [17 CFR 229.302(a)(3)]. 
The requirement applies to items recognized in each full quarter 
within the two most recent fiscal years and any subsequent interim 
period for which financial statements are included or are required 
to be included.
    \270\ Item 302(a)(4) of Regulation S-K [17 CFR 229.302(a)(4)].
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a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended 
eliminating Item 302(a)(1), stating that this disclosure has been 
previously reported.\271\
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    \271\ See letter from Gregg L. Nelson, VP Accounting Policy & 
Financial Reporting, IBM Corporation (Aug. 7, 2014) (``IBM'').
---------------------------------------------------------------------------

b. Discussion
    A few years after adopting Form 10-Q, in 1974, the Commission noted 
that quarterly data was still being ``reported on an extremely 
abbreviated basis and annual financial statements [had] generally been 
presented without regard for or disclosure of trends occurring within a 
year.'' \272\ To help remedy this information deficiency, the 
Commission adopted the precursor to Item 302(a), Rule 3-16(t) of 
Regulation S-X. This rule required, for certain registrants, disclosure 
of selected quarterly financial data in the notes to the annual 
financial statements.\273\
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    \272\ See Interim Financial Data; Proposals to Increase 
Disclosure, Release No. 34-11142 (Dec. 19, 1974) [40 FR 1079 (Jan. 
6, 1975)] (``Proposals to Increase Disclosure of Interim Results by 
Registrants'') at 1080.
    \273\ See Interim Financial Reporting: Increased Disclosures, 
Release No. 33-5611 (Sept. 10, 1975) [40 FR 46107 (Oct. 6, 1975)] 
(``1975 Interim Financial Reporting Release''). Rule 3-16(t) of 
Regulation S-X required disclosure in a note to the financial 
statements of net sales, gross profit, income before extraordinary 
items and cumulative effect of a change in accounting, per share 
data based upon such income, net income for each full quarter within 
the two most recent fiscal years and any subsequent interim period 
for which income statements are presented. It also required 
registrants to describe the effect of any disposals of segments of a 
business and extraordinary, unusual or infrequently occurring items 
recognized in each quarter, as well as the aggregate effect and the 
nature of year-end or other adjustments which are material to the 
results of that quarter. Furthermore, it required a reconciliation 
of amounts previously reported on Form 10-Q to the quarterly data 
included in the note to financial statements if the amounts differ. 
See id.
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    The Commission recognized that numerous commenters opposed the 
requirements, suggesting that interim results are materially affected 
by random events and that including such data in annual financial 
statements would lend them an appearance of reliability that could be 
misleading.\274\ The Commission nevertheless adopted the disclosure 
requirement, stating its belief that this disclosure would ``materially 
assist investors in understanding the pattern of corporate activities 
throughout a fiscal period'' by disclosing trends over segments of time 
that are sufficiently short to reflect business turning points.\275\ By 
contrast, the Commission stated that annual periods ``may obscure such 
turning points and may reflect a pattern of stability and growth which 
is not consistent with business reality.'' \276\ The Commission also 
noted that quarterly data would reflect seasonal patterns. Recognizing 
the costs of providing quarterly data, the Commission provided an 
exemption for smaller registrants and registrants whose shares were not 
actively traded.\277\ Because the selected quarterly financial data was 
unaudited, and recognizing that information contained within the 
financial statements should be audited, the Commission moved the 
requirement to Regulation S-K in 1980.\278\
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    \274\ Id.
    \275\ Id. at 46107.
    \276\ Id. at 46108.
    \277\ See id. at 46107 (``The Commission believes that the 
greatest investor need for these data exists in the case of such 
companies whose activities are most closely followed by analysts and 
investors. Accordingly, registrants whose shares are not actively 
traded or whose size is below certain limits have been exempted from 
this rule at the present time.'').
    See also Audit Committee Disclosure, Release No. 34-42266 (Dec. 
22, 1999) [64 FR 73389 (Dec. 30, 1999)] (summarizing the 
requirements for application of Item 302(a) that had been in effect 
since 1980). The requirements only applied to registrants who met 
certain tests, including but not limited to: (1) Two of the three 
following requirements: (a) Shares outstanding have a market value 
of at least $2.5 million; (b) the minimum bid price is at least $5 
per share; or (c) the registrant has at least $2.5 million of 
capital, surplus, and undivided profits; and (2) the registrant and 
its subsidiaries: (a) Have had net income after taxes but before 
extraordinary items and the cumulative effect of a change in 
accounting of at least $250,000 for each of the last three fiscal 
years; or (b) had total assets of at least $200 million for the last 
fiscal year end. See id.
    \278\ See General Revision of Regulation S-X, Release No. 33-
6233 (Sept. 2, 1980) [45 FR 63660 (Sept. 25, 1980)]. See also 
General Revision of Regulation S-X, Release No. 33-6178 (Jan. 15, 
1980) [45 FR 5943 (Jan. 24, 1980)] at 5945 (``Based upon the premise 
that information contained within the financial statements should be 
audited, the proposed rules would remove from [Regulation] S-X the 
requirement relating to unaudited information concerning selected 
quarterly financial data and place this requirement under Regulation 
S-K.'').
---------------------------------------------------------------------------

    While most of the disclosure required by Item 302(a) is required in 
prior quarterly reports, Item 302(a)(1) also requires a separate 
presentation of certain items for a registrant's fourth quarter, which 
is not otherwise required. Although there is no similar requirement for 
disclosing the fourth fiscal quarter, U.S. GAAP typically allows 
investors to infer fourth quarter data by requiring disclosure of 
disposals of components of an entity and unusual or infrequently 
occurring items recognized in the fourth quarter.\279\
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    \279\ ASC 270-10-50-2 requires the disclosure of certain 
information if interim data and disclosures are not separately 
reported for the fourth quarter. This information includes 
``disposals of components of an entity and unusual, or infrequently 
occurring items recognized in the fourth quarter, as well as the 
aggregate effect of year-end adjustments that are material to the 
results of that quarter.''
---------------------------------------------------------------------------

    Additionally, as Item 302(a)(2) requires disclosure of variances in 
results from amounts previously reported for the two most recent fiscal 
years, the effect of a retrospective change in any quarter for which a 
Form 10-Q was filed in the more recent of the two fiscal years will be 
disclosed in the selected quarterly data. Absent Item 302(a)(2), this 
variance would not be disclosed until the following year in the 
corresponding fiscal quarter in which the retrospective change 
occurred. Disclosure in the Form 10-Q for this corresponding fiscal 
quarter would not include the effects of this change in the earliest of 
the two years presented in the Form 10-K, as this Form 10-Q would be 
limited to the current and prior-year interim periods.
c. Request for Comment
    79. Should we retain or eliminate Item 302(a)? Why? If we retain 
Item

[[Page 23941]]

302(a), should we modify the item and, if so, how? For example, should 
we modify the item to require additional disclosure and, if so, what 
additional disclosure would be important to investors and why?
    80. Is fourth quarter information, which is required under Item 
302(a) but not in the annual financial statements, important to 
investors? Do the other instances where disclosure required by Item 
302(a) is not duplicative of previously provided disclosure merit 
retaining the item? Why or why not?
    81. The disclosure required by Item 302(a) was originally intended 
to help investors understand the pattern of corporate activities 
throughout a fiscal period by disclosing trends over segments of time 
that are sufficiently short to reflect business turning points.\280\ 
Does this objective remain important today? If so, does the item 
achieve this objective? If the item does not achieve this objective, 
how could we modify it to do so?
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    \280\ See Interim Reporting Amendments Release.
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    82. Should we require auditor involvement (e.g., audit, review or 
specified procedures) on the reliability of the disclosure, and if so, 
what should the nature of the involvement be? What would be the 
benefits and costs to registrants and to investors?
    83. Item 302(a) disclosure is commonly provided either as an 
unaudited note to the financial statements in Form 10-K \281\ or 
separately outside of the financial statements. To the extent a 
registrant's Item 302(a) disclosure is provided in the notes to the 
financial statements, it must be tagged as XBRL data. Registrants' 
financial statements and footnotes presented in quarterly reports must 
also be tagged in XBRL.\282\ Given some of Item 302(a) disclosure is 
available in prior quarterly reports and also tagged in XBRL, do 
investors use the disclosure required by Item 302(a)?
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    \281\ This may be due to the fact that the requirements to 
provide annual financial statements and Item 302 disclosure are both 
in Item 8(a) of Form 10-K [17 CFR 249.310].
    \282\ Rule 405 of Regulation S-T [17 CFR 232.405]. See also 
Interactive Data Release.
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    84. What types of investors or audiences are most likely to value 
the information required by Item 302?
    85. What is the cost of providing the disclosure required by Item 
302, including the administrative and compliance costs of preparing and 
disseminating this disclosure? How would these costs change if we made 
any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 302.
    86. Would costs to investors increase if Item 302 was eliminated 
and if so, how?
    87. What are the benefits of providing the disclosure required by 
Item 302? How could the benefits change if we made any of the changes 
contemplated here? Please provide quantified or qualitative estimates 
where possible relating to disclosure under Item 302.
3. Content and Focus of MD&A (Item 303--Generally)
    Item 303 of Regulation S-K requires disclosure of information 
relevant to assessing a registrant's financial condition, changes in 
financial condition and results of operations.\283\ Item 303(a) 
contains three core components that registrants must analyze in their 
MD&A disclosures: Liquidity, capital resources, and results of 
operations.\284\ Item 303(a) also requires disclosure of off-balance 
sheet arrangements and contractual obligations.\285\
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    \283\ Instruction 2 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)].
    \284\ Item 303(a)(1), (a)(2) and (a)(3) of Regulation S-K [17 
CFR 229.303(a)(1), (a)(2) and (a)(3)].
    \285\ Item 303(a)(4) and (a)(5) of Regulation S-K [17 CFR 
229.303(a)(4) and (a)(5)].
    See also Disclosure in Management's Discussion and Analysis 
About Off-Balance Sheet Arrangements and Aggregate Contractual 
Obligations, Release No. 33-8182 (Jan. 28, 2003) [68 FR 5982 (Feb. 
5, 2003)] (``Off-Balance Sheet and Contractual Obligations Adopting 
Release'').
---------------------------------------------------------------------------

    Overall, these MD&A requirements are intended to satisfy three 
principal objectives:
     Provide a narrative explanation of a registrant's 
financial statements that enables investors to see the registrant 
through the eyes of management;
     enhance the overall financial disclosure and provide the 
context within which financial information should be analyzed; and
     provide information about the quality of, and potential 
variability of, a registrant's earnings and cash flow, so investors can 
ascertain the likelihood that past performance is indicative of future 
performance.\286\
---------------------------------------------------------------------------

    \286\ See 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------

    The Commission has provided substantial guidance in the past 
intended to improve the quality of MD&A disclosures.\287\ Much of this 
guidance has focused on the following topics:
---------------------------------------------------------------------------

    \287\ See, e.g., Commission Guidance on Presentation of 
Liquidity and Capital Resources Disclosures in Management's 
Discussion and Analysis, Release No. 33-9144 (Sept. 17, 2010) [75 FR 
59894 (Sept. 28, 2010)] (``2010 Liquidity and Capital Resources 
Interpretive Release''); 2003 MD&A Interpretive Release; Commission 
Statement About Management's Discussion and Analysis of Financial 
Condition and Results of Operations, Release No. 33-8056 (Jan. 22, 
2002) [67 FR 3746 (Jan. 25, 2002)] (``2002 Commission Statement 
about MD&A''); 1989 MD&A Interpretive Release.
---------------------------------------------------------------------------

     Quality and focus of analysis;
     forward-looking information; and
     use of key performance indicators.\288\

    \288\ See generally 2003 MD&A Interpretive Release (addressing 
each of these topics throughout).

To help achieve the principal objectives of MD&A, and before evaluating 
specific subsections of Item 303(a), we seek public input on these 
topics and how we could improve the overall quality of MD&A disclosure.
a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter stated that MD&A 
requirements are too principles-based.\289\ Another commenter stated 
that MD&A's principles-based approach results in disclosure that is 
``among the most meaningful disclosure contained in periodic reports.'' 
\290\ Another commenter recommended reexamining MD&A to, among other 
things, reinforce the guiding principle of materiality so that MD&A is 
more useful for investors.\291\ One commenter recommended, in addition 
to MD&A, adopting a rule requiring registrants to provide an overview 
of their performance in the most recent year as well as expectations 
and concerns for the coming year, similar to what a CEO might report to 
the Board of Directors.\292\ This commenter suggested placing the 
disclosure at the beginning of annual reports on Forms 10-K and 20-F. 
One commenter stated there should be ``greater clarity'' between the 
type of forward-looking information required in MD&A versus the 
``future-oriented'' information that the Financial Accounting Standards 
Board (``FASB'') believes is appropriate.\293\
---------------------------------------------------------------------------

    \289\ See CFA Institute. This commenter also stated that 
disclosure effectiveness efforts should prioritize improving 
financial statement presentation and enhancing challenging 
disclosures, such as estimates, judgments, and choices; risks and 
uncertainties; off-balance sheet items; commitments and 
contingencies; intangible assets; and going concern issues.
    \290\ See Shearman.
    \291\ See CCMC.
    \292\ See letter from Committee on Financial Reporting, New York 
City Bar (Sept. 3, 2014) (``NYC Bar'').
    \293\ See SCSGP.
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    One commenter suggested consolidating Commission and staff guidance 
on MD&A, stating that consolidation would reduce the time and effort 
necessary to identify and read all applicable sources and improve the

[[Page 23942]]

quality of MD&A disclosure.\294\ This commenter recommended 
consolidating all applicable guidance in a single, electronically-
accessible location with hyperlinks to relevant sources, or 
alternatively, revising Item 303 to codify prior staff guidance.\295\ 
This commenter also recommended adding instructions throughout Item 303 
indicating that, to the extent disclosure in response to the item is 
included in the notes to the financial statements, registrants should 
use cross-references to avoid duplicative disclosure.\296\
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    \294\ See ABA 2. See also letter from Henry T. C. Hu (Oct. 7, 
2015) (``Hu'') (referencing a ``bewildering stream of guidance of 
varying degrees of formality and legal import'' since Item 303's 
adoption in 1980).
    \295\ See ABA 2.
    \296\ See id. (specifying Items 303(a)(1), (a)(4), (a)(5) and 
disclosure of critical accounting estimates).
---------------------------------------------------------------------------

b. Quality and Focus of Analysis
i. Discussion
    MD&A requires not only a discussion but also an analysis of known 
material trends and uncertainties and should not reiterate financial 
statement information in a narrative form.\297\ The Commission has 
previously stated that a thorough analysis should assess both the 
effects of known material trends and uncertainties and the reasons 
underlying those effects.\298\ The Commission has also stated that, if 
there is a reasonable likelihood that reported financial information is 
not indicative of a registrant's future financial condition or future 
operating performance, then registrants should disclose the underlying 
reasons.\299\
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    \297\ See 2003 MD&A Interpretive Release.
    \298\ See id.
    \299\ See id. As an example, the Commission stated that if a 
change in an estimate has a material favorable impact on earnings, 
the change and the underlying reasons should be disclosed so that 
readers do not incorrectly attribute the effect to operational 
improvements.
---------------------------------------------------------------------------

    The Commission has focused on improving the analysis in MD&A for 
many years. For example, the 1989 MD&A Interpretive Release explained 
that MD&A is intended to give investors an opportunity to look at a 
registrant through the eyes of management by providing both a short and 
long-term analysis of the business of the registrant.\300\ Despite Item 
303(a)'s instruction to the contrary,\301\ many registrants simply 
recite the amounts of changes from year to year which are readily 
computable from their financial statements. In 2003 guidance, the 
Commission added that such recitation of financial statements in 
narrative form fails to provide the unique perspective available to 
management that MD&A is meant to capture.\302\ An effective analysis of 
known material trends, events, demands, commitments and uncertainties 
should include an explanation of the underlying reasons or 
implications, interrelationships between constituent elements, or the 
relative significance of those matters.\303\
---------------------------------------------------------------------------

    \300\ See 1989 MD&A Interpretive Release.
    \301\ Instruction 4 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)].
    \302\ See 2003 MD&A Interpretive Release.
    \303\ See id.
---------------------------------------------------------------------------

    Prior to 1980, Commission rules required registrants to provide a 
summary of earnings, including a discussion of unusual conditions that 
affected the appropriateness of the earnings presentations.\304\ The 
rules also required registrants to discuss items of revenue or expense 
that changed more than ten percent from the prior period or changed 
more than two percent of the average net income or loss for the most 
recent three years presented. In adding MD&A to Regulation S-K in 1980, 
the Commission replaced the percentage thresholds with a principles-
based approach that primarily focused on materiality.\305\ The 
Commission noted that the percentage tests applied without regard to 
any concept of materiality or significance to the registrant's 
business, resulting in meaningful discussion often being obscured by 
information of little relevance.\306\
---------------------------------------------------------------------------

    \304\ See Guidelines for Registration and Reporting, Release No. 
33-5520 (Aug. 14, 1974) [39 FR 31894 (Sept. 3, 1974)] (``Guidelines 
Adopting Release''). These guidelines, known as Guide 22, were the 
precursor to MD&A that predated Regulation S-K. See infra note 344.
    \305\ See 1980 Form 10-K Adopting Release.
    \306\ See id. at 63636 (``The changes in Management's Discussion 
and Analysis were proposed as the result of the Commission's 
concerns that the disclosure elicited by the present requirement of 
Guides 1 and 22 is not fulfilling originally contemplated 
objectives. Instead, existing percentage tests are applied without 
regard to any concept of materiality or significance to the 
registrant's business. Accordingly, although some portions of the 
resulting discussion may be meaningful, the meaningful discussion is 
often obscured by the inclusion of material which is of little 
relevance.''). The Commission also clarified that causes of material 
changes in line items must be described only to the extent necessary 
to an understanding of a company's business as a whole.
---------------------------------------------------------------------------

    Commission guidance has continued to stress the importance of 
materiality in MD&A and stated that disclosure should emphasize 
material information and de-emphasize or, if appropriate, delete 
immaterial information.\307\ The text of Item 303 ties several specific 
requirements to materiality. For example, disclosure of known trends in 
liquidity is required if such trends are reasonably likely to affect 
liquidity ``in any material way.'' \308\ Commitments for capital 
expenditures that are material must be described as of the end of the 
latest fiscal period.\309\ Registrants also must describe certain 
events, transactions, or economic changes that ``materially affected'' 
reported income from continuing operations.\310\
---------------------------------------------------------------------------

    \307\ See 2003 MD&A Interpretive Release.
    \308\ Item 303(a)(1) of Regulation S-K [17 CFR 229.303(a)(1)].
    \309\ Item 303(a)(2) of Regulation S-K [17 CFR 229.303(a)(2)].
    \310\ Item 303(a)(3) of Regulation S-K [17 CFR 229.303(a)(3)].
---------------------------------------------------------------------------

    In addition to emphasizing materiality, the Commission has also 
recommended a ``layered approach'' as a way to improve the quality of 
analysis in MD&A.\311\ A layered approach requires registrants to 
present information in a manner that emphasizes, within the universe of 
material information that is disclosed, the information and analysis 
that is most important.\312\ While not required by Item 303, providing 
an executive-level overview to MD&A may be one way of taking a layered 
approach.
---------------------------------------------------------------------------

    \311\ See 2003 MD&A Interpretive Release at 75059 (``While all 
required information must of course be disclosed, companies should 
consider using a `layered' approach. [. . .] This presentation would 
assist readers in identifying more readily the most important 
information. Using an overview or introduction is one example of a 
layered approach.'').
    \312\ See id. For further discussion of layered disclosure, see 
SectionV.F.
---------------------------------------------------------------------------

    Executive-level overviews should discuss the most important matters 
to MD&A, and the Commission has cautioned that this overview should not 
be a duplicative layer of disclosure repeated elsewhere.\313\ Rather 
than summarize information already disclosed, the executive overview 
should provide a balanced, high-level discussion that identifies the 
most important themes or other significant matters with which 
management is concerned primarily in evaluating the registrant's 
financial condition and operating results. The overview should provide 
insight into material opportunities, challenges and risks, such as 
those presented by known material trends and uncertainties, on which 
the registrant's executives are most focused for both the short and 
long term, as well as the actions they are taking to address these 
opportunities, challenges and risks.\314\
---------------------------------------------------------------------------

    \313\ See 2003 MD&A Interpretive Release.
    \314\ See id.
---------------------------------------------------------------------------

ii. Request for Comment
    88. What requirements in Item 303 are important to investors? How 
could Item 303 be improved?
    89. Do the current requirements of Item 303 result in disclosure 
that

[[Page 23943]]

highlights the most significant aspects of the registrant's financial 
condition and results of operations? Are there any requirements in Item 
303(a) and (b) that result in immaterial disclosures that may obscure 
significant information? If so, how? Should we consider a qualitative 
or quantitative threshold rather than materiality for requiring MD&A 
disclosure? If so, what threshold would be appropriate and why? Would 
adopting a different standard impede the flexibility of analysis and 
assessment under the current materiality standard? If so, how?
    90. There are various sources of Commission and Division guidance 
on MD&A. These include Commission releases, sections of the Division's 
Financial Reporting Manual and staff Compliance and Disclosure 
Interpretations.\315\ Given the amount of Commission and staff guidance 
on MD&A, should we consolidate guidance in a single source? If so, 
which guidance remains helpful, and is there guidance that we should 
not include in a consolidation? Would consolidation of this guidance 
facilitate registrants' compliance with the item's requirements, or is 
the existing form of this guidance sufficient?
---------------------------------------------------------------------------

    \315\ See ABA 2 (providing a six-page exhibit illustrating the 
various sources of guidance on MD&A).
---------------------------------------------------------------------------

    91. Should we revise our rules to require registrants to provide an 
executive-level overview? If so, should our rules prescribe the 
information that must be covered? What would be the benefits and 
challenges of prescribing the content of the overview and what content 
should we require? For example, should we require an executive-level 
overview to discuss the most significant accounting estimates and 
judgments? Should any requirement for an executive-level overview be 
limited to registrants of a certain size?
    92. If we were to require an executive-level overview, how could we 
encourage registrants to provide an overview that does not simply 
duplicate disclosure provided elsewhere?
    93. Are there other methods that registrants could employ or new 
rules that we should consider that would result in more meaningful 
analysis in MD&A?
    94. What types of investors or audiences are most likely to value 
the information required by Item 303 and does the audience for 
disclosure vary across the different parts of Item 303 disclosure? If 
so, how? Would the manner of presentation affect how various types of 
investors benefit from Item 303 disclosure?
    95. Should we require a different format or presentation of MD&A 
such as a requirement for the discussion to be tagged or presented in a 
structured manner?
    96. Should we require auditor involvement (e.g., audit, review or 
specified procedures) regarding the reliability of MD&A disclosure, and 
if so, what should the nature of the involvement be? What would be the 
benefits and costs to registrants and to investors?
    97. What is the cost of providing the disclosure required by Item 
303, including the administrative and compliance costs of preparing and 
disseminating this disclosure? How would these costs change if we made 
any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 303.
    98. What are the benefits of providing the disclosure required by 
Item 303? How could the benefits change if we made any of the changes 
contemplated here? Please provide quantified or qualitative estimates 
where possible relating to disclosure under Item 303.
c. Forward-Looking Information
i. Discussion
    Discussion and analysis of known trends, demands, commitments, 
events and uncertainties requires disclosure of forward-looking 
information.\316\ This information is significant to understanding a 
registrant's expected future performance. The Commission previously has 
provided guidance relating to the standard for disclosure of forward-
looking information and encouraged registrants to provide such forward-
looking disclosure.\317\
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    \316\ For example, the following provisions in Item 303 require 
disclosure of prospective information: Item 303(a)(1) (any known 
trends or any known demands, commitments, events or uncertainties 
that will result in or that are reasonably likely to result in the 
registrant's liquidity increasing or decreasing in any material 
way); Item 303(a)(2)(ii) (any known material trends in capital 
resources and any expected material changes in the mix and relative 
cost of capital resources); Item 303(a)(3)(ii) (any known trends or 
uncertainties that the registrant reasonably expects will have a 
material favorable or unfavorable impact on net sales or revenues or 
income from continuing operations); and Instruction 3 to Item 303(a) 
(descriptions and amounts of matters that would have an impact on 
future operations and have not had an impact in the past and matters 
that have had an impact on reported operations and are not expected 
to have an impact upon future operations.).
    \317\ See 2003 MD&A Interpretive Release at 75059 (``In 
addressing prospective financial condition and operating 
performance, there are circumstances, particularly regarding known 
material trends and uncertainties, where forward-looking information 
is required to be disclosed. We also encourage companies to discuss 
prospective matters and include forward-looking information in 
circumstances where that information may not be required, but will 
provide useful material information for investors that promotes 
understanding.'').
---------------------------------------------------------------------------

    In 1987, the Commission distinguished between required and optional 
forward-looking disclosure: Required forward-looking disclosure is 
based on currently known trends, events and uncertainties that are 
reasonably expected to have material effects, while optional forward-
looking disclosure involves either anticipating a future trend or event 
or anticipating a less predictable impact of a known event, trend or 
uncertainty.\318\ In 1989, the Commission articulated a two-step test 
(``two-step test'') for assessing when forward-looking disclosure is 
required in MD&A:
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    \318\ Concept Release on Management's Discussion and Analysis of 
Financial Condition and Operations, Release No. 33-6711 (Apr. 17, 
1987) [52 FR 13715 (Apr. 24, 1987)].
     In 1989, the Commission also explained that the safe harbors of 
Securities Act Rule 175(c) and Exchange Act Rule 3b-6(c) apply to 
required statements concerning the future effect of known material 
trends and uncertainties. See 1989 MD&A Interpretive Release.
    The Commission adopted the foregoing rules in 1979 to encourage 
the disclosure of projections and forward-looking information as 
recommended by the Sommer Report. See Safe Harbor Rule for 
Projections, Release No. 33-6084 (June 25, 1979) [44 FR 38810 (July 
2, 1979)].

    Where a trend, demand, commitment, event or uncertainty is 
known, management must make two assessments:
    (1) Is the known trend, demand, commitment, event or uncertainty 
likely to come to fruition? If management determines that it is not 
reasonably likely to occur, no disclosure is required.
    (2) If management cannot make that determination, it must 
evaluate objectively the consequences of the known trend, demand, 
commitment, event or uncertainty, on the assumption that it will 
come to fruition. Disclosure is then required unless management 
determines that a material effect on the registrant's financial 
condition or results of operations is not reasonably likely to 
occur.\319\
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    \319\ See 1989 MD&A Interpretive Release at 22430.

For forward-looking information, the Commission distinguished the 
standard for disclosure under Item 303 from the standard for disclosure 
necessary to avoid liability for fraud under Rule 10b-5 and stated that 
the ``probability/magnitude test for materiality approved by the 
Supreme Court in Basic, Inc., v. Levinson . . . is inapposite to Item 
303 disclosure.'' \320\ The Commission has

[[Page 23944]]

also stated that this ``reasonably likely'' standard is a lower 
threshold than ``more likely than not.'' \321\
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    \320\ Id. In Basic, the Supreme Court framed the issue of 
materiality of forward-looking disclosure as depending upon a 
balancing of both ``the indicated probability that the event will 
occur and the anticipated magnitude of the event in light of the 
totality of the company activity.'' 485 U.S. at 231 (quoting SEC v. 
Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968)).
    \321\ See 2002 Commission Statement about MD&A at 3748.
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    Several federal courts of appeals have since referenced the 
Commission's two-step test and addressed its role in potential 
liability under Exchange Act Section 10(b) and Rule 10b-5 thereunder. 
Although the courts are divided on the issue of whether Item 303 
requirements create a general duty to disclose in the Rule 10b-5 
context, these courts have agreed that the Supreme Court's standard in 
Basic v. Levinson is the appropriate standard for determining liability 
under Rule 10b-5 rather than the Commission's two-step test.\322\
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    \322\ See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100-
104 (2d Cir. 2015) (holding that Item 303 requirements do give rise 
to a duty to disclose that may serve as the basis for liability 
under Rule 10b-5, but indicating that the Basic test for materiality 
of forward-looking disclosures controls instead of the Commission's 
two-step test); In re NVIDIA Corp. Sec. Lit., 768 F.3d 1046, 1054-56 
(9th Cir. 2014) (holding that Item 303 does not create a duty to 
disclose for Rule 10b-5 purposes and distinguishing the two-step 
test from the Basic materiality standard for forward-looking 
disclosure); Oran v. Stafford, 226 F.3d 275, 287-288 (3d Cir. 2000) 
(leaving open the question of whether an Item 303 violation could 
ever serve as the basis for liability under Rule 10b-5, but holding 
that Basic supplied the applicable standard for testing 10b-5 
liability for forward-looking disclosures).
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ii. Request for Comment
    99. Does the two-step test for disclosure of a known trend, demand, 
commitment, event or uncertainty result in the most meaningful forward-
looking disclosure? Why or why not? How do registrants determine when 
something is ``reasonably likely'' to occur?
    100. Should we revise the two-step test to apply a different 
standard in the first prong and if so, how? For example, should we 
require disclosure when a trend, event or uncertainty is more likely 
than not, probable, or reasonably possible to occur, rather than 
``reasonably likely'' to occur? \323\
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    \323\ See ASC 450-20-25-1. Under U.S. GAAP, when a loss 
contingency exists, the likelihood that the future event or events 
will confirm the loss or impairment of an asset or the incurrence of 
a liability can range from probable to remote. The areas within that 
range are: Probable (the future event or events are likely to 
occur), reasonably possible (the chance of the future event or 
events occurring is more than remote but less than likely) and 
remote (the chance of the future event or events occurring is 
slight).
    In the context of Item 303(a)(4) (off-balance sheet 
arrangements), the Commission previously considered whether the 
``reasonably likely'' threshold was appropriate for prospective 
information. Most commenters supported the ``reasonably likely'' 
standard. Many commenters opposed a ``remote'' threshold stating it 
would be difficult for management to apply, yield voluminous 
disclosures; attribute undue prominence to information that is not 
important to investors; confuse or mislead investors; and elicit 
information that would not be comparable among firms. The Commission 
adopted the ``reasonably likely'' threshold concluding that it 
focused on the information most important to an understanding of a 
registrant's off-balance sheet arrangements and their material 
effects. The Commission also noted potential difficulty in 
attempting to comply with the ``remote'' threshold and that use of a 
consistent threshold throughout MD&A would preclude the potential 
confusion that could result from disparate thresholds. See Off-
Balance Sheet and Contractual Obligations Adopting Release.
---------------------------------------------------------------------------

    101. Should we eliminate the two-step test in favor of a different 
standard for identifying required and optional forward-looking 
disclosure and, if so, what test would be appropriate? For example, 
should we revise Item 303 to incorporate the probability/magnitude 
standard from Basic v. Levinson? \324\ Which standard--the two-part 
test, Basic's probability/magnitude standard, or some other standard--
should we require, and why? Would any particular formulation be more or 
less burdensome for registrants?
---------------------------------------------------------------------------

    \324\ See supra note 320.
---------------------------------------------------------------------------

    102. We have stated previously that quantification of the material 
effects of known material trends and uncertainties can promote 
understanding and may be required to the extent material.\325\ Should 
we revise Item 303 to specifically require registrants, to the extent 
practicable, to quantify the material effects of known trends and 
uncertainties as well as the factors that contributed to those known 
trends and uncertainties? Why?
---------------------------------------------------------------------------

    \325\ See 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------

d. Key Indicators of Financial Condition and Operating Performance

i. Discussion

    The Commission has previously stressed that registrants should 
identify and address those key variables and other qualitative and 
quantitative factors that are peculiar to and necessary for an 
understanding and evaluation of the individual registrant.\326\ Key 
performance indicators include both financial and non-financial 
measures. Non-financial measures may relate to external or macro-
economic matters as well as those specific to a registrant or 
industry.\327\ The Commission has also encouraged registrants to 
consider whether disclosure of all key variables and other factors that 
management uses to manage the business would be material to investors 
or would promote an understanding of MD&A.\328\
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    \326\ See id. (quoting the 1989 MD&A Interpretive Release, which 
quotes Management's Discussion and Analysis of Financial Condition 
and Results of Operations, Release No. 33-6349 (Sept. 28, 1981) [not 
published in the Federal Register]).
    \327\ External or macro-economic matters, such as interest rates 
or economic growth rates, and their anticipated trends can be 
important variables for many registrants. The Commission has further 
encouraged registrants to consider disclosing information that may 
be peripheral to the accounting function, but is integral to the 
business or operating activity. Examples of such measures, depending 
on the circumstances of a particular registrant, can include those 
based on units or volume, customer satisfaction, time-to-market, 
interest rates, product development, service offerings, throughput 
capacity, affiliations/joint undertakings, market demand, customer/
vendor relations, employee retention, business strategy, changes in 
the managerial approach or structure, regulatory actions or 
regulatory environment, and any other pertinent macroeconomic 
measures. See 2003 MD&A Interpretive Release at note 27 and 
accompanying text.
    \328\ See id.
---------------------------------------------------------------------------

    Some registrants discuss industry-specific key performance 
indicators in MD&A, although there is not a specific requirement for 
this disclosure. For example, electronic gaming or social media 
companies typically discuss their numbers of monthly active users; 
numbers of unique users; numbers of unique payers; and other metrics 
relating to usage. Software service companies typically discuss their 
numbers of subscribers; customer renewal rates; and customer retention 
rates. Hospitals typically discuss their numbers of admissions; numbers 
of beds; the average length of inpatient stays; and occupancy rates. 
Retailers typically discuss comparable store sales, sales per square 
foot or gross merchandise value. Recent academic studies find that the 
industry-specific key factors disclosed by retailers and manufacturers 
provide incremental information that can help to predict registrants' 
future performance beyond traditional financial statement 
variables.\329\
---------------------------------------------------------------------------

    \329\ See, e.g., C. Cole and C. Jones, The Usefulness of MD&A 
Disclosures in Retail Industry, 30 J. Acct. Auditing Fin. 127, 127-
149 (2015). See also Y. Sun, Do MD&A Disclosures Help Users 
Interpret Disproportionate Inventory Increases?, 85 Acct. Rev. 1411, 
1411-1440 (2010) (measuring the informativeness of this disclosure 
by measuring to what degree the information in the disclosure can 
help to predict variables such as future revenues and earnings or 
contemporary stock returns, beyond financial statement variables or 
other factors that can help to predict these variables).
---------------------------------------------------------------------------

    Where there is no commonly accepted method of calculating a 
particular non-financial metric, the Commission has said that the 
registrant should provide an explanation of the calculation of the 
metric to promote comparability across registrants within the 
industry.\330\ In addition, key performance indicators, where 
disclosed, should be included in a format that will enhance the 
understanding of the discussion and analysis.\331\
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    \330\ See 2003 MD&A Interpretive Release.
    \331\ See id.

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[[Page 23945]]

ii. Request for Comment
    103. Should we revise Item 303 to include a principles-based 
requirement for all registrants to disclose performance metrics and 
other key variables important to their business? Why or why not?
    104. Should we require disclosure of any commentary, analysis, 
performance indicators or business drivers related to a registrant's 
key indicators? If so, why? For example, would it be feasible to adopt 
prescriptive requirements for discussion of specific performance 
metrics that are applicable to an entire industry and are easily 
comparable between registrants?
    105. What types of investors or audiences are most likely to value 
industry-specific key performance indicators?
    106. What would be the costs and benefits of requiring registrants 
in certain industries to disclose standardized performance metrics? How 
could we identify which performance metrics should be standardized 
across an industry?
4. Results of Operations (Item 303(a)(3))
    Item 303(a)(3) requires a discussion and analysis of a registrant's 
results of operations and specifies four areas of disclosure:
     Any unusual or infrequent events or transactions or any 
significant economic changes that materially affected the amount of 
reported income from continuing operations and the extent to which 
income was so affected; \332\
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    \332\ Item 303(a)(3)(i) of Regulation S-K [17 CFR 
229.303(a)(3)(i)].
---------------------------------------------------------------------------

     known trends or uncertainties that have had, or that the 
registrant reasonably expects will have, a material impact on net sales 
or revenues or income from continuing operations; \333\
---------------------------------------------------------------------------

    \333\ Item 303(a)(3)(ii) of Regulation S-K [17 CFR 
229.303(a)(3)(ii)].
---------------------------------------------------------------------------

     material increases in net sales or revenues, including the 
extent such increases are attributable to increases in prices, 
increases in the volume or amount of goods or services being sold, or 
to the introduction of new products or services; \334\ and
---------------------------------------------------------------------------

    \334\ Item 303(a)(3)(iii) of Regulation S-K [17 CFR 
229.303(a)(3)(iii)].
---------------------------------------------------------------------------

     for the three most recent fiscal years, a discussion of 
the impact of inflation and changing prices on the registrant's net 
sales and revenues, and on income from continuing operations.\335\
---------------------------------------------------------------------------

    \335\ Item 303(a)(3)(iv) of Regulation S-K [17 CFR 
229.303(a)(3)(iv)].
---------------------------------------------------------------------------

    Instruction 1 to Item 303(a) states that the discussion and 
analysis shall cover the three-year period covered by the financial 
statements and use year-to-year comparisons or any other format that in 
the registrant's judgment would enhance a reader's understanding.\336\ 
Instruction 4 to Item 303(a) provides that registrants need not recite 
the amounts of changes from year to year that are readily computable 
from the financial statements.\337\
---------------------------------------------------------------------------

    \336\ SRCs may limit their disclosure to the two-year period 
covered by their financial statements. Instruction 1 to Item 303(a) 
of Regulation S-K [17 CFR 229.303(a)].
    \337\ Instruction 4 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)].
---------------------------------------------------------------------------

a. Comments Received
    S-K Study: One commenter recommended that we eliminate the 
requirement to include prior-period results in MD&A as this information 
is readily available in prior filings.\338\ This commenter added that 
the existing requirements in Item 303 should be sufficient to result in 
a comprehensive discussion of a three-year trend without a year-to-year 
comparison.
---------------------------------------------------------------------------

    \338\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative: A few commenters recommended 
eliminating prior period results in MD&A as this information is readily 
available in previous filings.\339\ One of these commenters stated it 
would be more appropriate to require a discussion of only the most 
recently completed annual or quarterly period and that discussion of 
prior periods ``can create more confusion and distraction than 
elucidation among investors.'' \340\ Another one of these commenters 
stated its belief that two years of financial statements is sufficient 
disclosure as the five-year selected financial data would provide 
multiyear trend information.\341\ This commenter also stated its belief 
that a two year financial statement requirement would eliminate 
``clutter'' in MD&A and ``allow users to focus on new, material 
information about the latest fiscal year.''
---------------------------------------------------------------------------

    \339\ See, e.g., CCMC; IBM; SCSGP (noting that the existing 
requirements in Item 303 are sufficient to elicit a discussion of 
trends over the relevant three-year period, if such a trend exists 
and is material); A. Radin; Ernst & Young 2.
    \340\ See CCMC.
    \341\ See Ernst & Young 2 (also noting that financial statements 
covering three years are more voluminous and costly to prepare and 
that most foreign jurisdictions only require two years of financial 
statements).
---------------------------------------------------------------------------

    One commenter disagreed with eliminating the requirement to include 
prior-period results in MD&A because doing so would require investors 
to look for the information elsewhere.\342\ One commenter suggested 
revising Instruction 4 to Item 303(a) to allow registrants to omit a 
discussion of changes in line items on the financial statements, to the 
extent those changes are not material and such omission would not 
materially impair an investor's understanding of the registrant's 
results of operations.\343\
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    \342\ See CFA Institute.
    \343\ See ABA 2.
---------------------------------------------------------------------------

b. Discussion
    Prior to the Commission's adoption of the MD&A disclosure 
requirements, Guide 22 and Guide 1 called for a summary of earnings and 
operations, as well as a full narrative explanation of the summary. The 
Guides also called for a separate discussion and analysis of the 
summary, including explanations of material changes from period to 
period in revenues and expenses.\344\ This discussion was intended to 
enable investors to compare periodic results of operations and to 
assess the source and probability of recurrence of earnings or 
losses.\345\ When adding MD&A to Regulation S-K in 1980, the Commission 
eliminated the summary of operations disclosure in favor of new 
requirements for a discussion ``focused on the financial statements'' 
with an emphasis on favorable or unfavorable trends and the 
identification of significant events or uncertainties.\346\ The 
Commission also expressed its view that a three-year financial 
statement requirement provides the minimum data necessary for an 
understanding of the changes in performance for two years.\347\
---------------------------------------------------------------------------

    \344\ Guide 22 applied only to registration statements under the 
Securities Act. Guide 1, applicable to Exchange Act filings, was 
adopted in 1974 to require disclosure similar to that of Guide 22. 
While Guide 22 focused on a summary of earnings, Guide 1 required a 
discussion and analysis of a registrant's summary of operations. 
Both Guides were eliminated in 1980 when their requirements were 
merged into a single requirement, now Item 303, calling for 
discussion and analysis of financial condition and results of 
operations. This represented a shift in focus towards the financial 
statements rather than upon a summary of operations. See Guidelines 
Adopting Release. When eliminating the Guides, the Commission noted 
that the ``narrow approach'' set forth in Guides 1 and 22 did not 
ordinarily produce a discussion that focused upon the financial 
condition of a registrant as a whole. The Commission also noted that 
``there is a growing need to analyze an enterprise's liquidity and 
capital resources, in addition to its revenues and income.'' See 
1980 Form 10-K Adopting Release at 63636.
    \345\ See Guidelines Adopting Release.
    \346\ 1980 Form 10-K Adopting Release at 63636.
    \347\ See Uniform Instructions as to Financial Statements--
Regulation S-X, Release No. 33-6179 (Jan. 15, 1980) [45 FR 5963 
(Jan. 24, 1980)].
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    In 2003, the staff conducted a review of annual reports filed by 
all Fortune 500 registrants and issued a significant number of comments 
seeking, among other things, greater analysis of

[[Page 23946]]

registrants' results of operation.\348\ The staff also discouraged 
registrants from providing rote calculations of percentage changes of 
financial statement items and boilerplate explanations of immaterial 
changes to these figures, encouraging them to include instead a 
detailed analysis of material year-to-year changes and trends.\349\ The 
staff continues to seek greater analysis of material year-to-year 
changes and trends by encouraging registrants to quantify components of 
material changes in financial statement line items and provide 
additional explanation of the underlying factors that cause such 
changes.
---------------------------------------------------------------------------

    \348\ See Summary by the Division of Corporation Finance of 
Significant Issues Addressed in the Review of the Periodic Reports 
of the Fortunate 500 Companies (2003), available at https://www.sec.gov/divisions/corpfin/fortune500rep.htm.
    \349\ See id. The staff also commented on boilerplate analyses 
that did not provide any insight into registrants' past performance 
or business prospects as understood by management.
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c. Request for Comment
    107. Should we retain, eliminate or modify the period-to-period 
comparisons provided in MD&A? Why?
    108. How could Item 303(a)(3) be improved? Would any additional 
disclosure about a registrant's results of operations be important to 
investors? If so, what additional disclosure would be important and 
why?
    109. Does the three-year comparison provide material information 
about trends or uncertainties that would not be reflected in filings 
for prior periods? Should we permit registrants to omit the earliest 
period in the three-year comparison when the earliest of the three 
years does not provide information that is important to investors? What 
would be the advantages and disadvantages of limiting the period-to-
period comparisons in MD&A to the most recent two fiscal periods?
    110. Should we allow registrants to eliminate the earliest of the 
two periods discussed so long as they cross-reference or include a 
hyperlink to the prior periods discussion in earlier Forms 10-K and 10-
Q? Why or why not?
    111. In complying with Item 303(a)(3), registrants almost 
exclusively rely on period-to-period comparisons even though our rules 
permit ``any other format that in the registrant's judgment would 
enhance a reader's understanding.'' \350\ Why do registrants rely 
almost exclusively on year-to-year comparisons? Would formats or 
presentations other than period-to-period comparisons enhance a 
reader's understanding of results of operations or encourage greater 
analysis of the income statement? If so, how? What other formats or 
presentations could result in a discussion and analysis of the material 
information necessary to an understanding of a registrant's 
performance, financial condition and prospects for the future? Should 
we require registrants to provide the comparison in a standardized 
tabular format or any other format?
---------------------------------------------------------------------------

    \350\ Instruction 1 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)] states the discussion must cover the three-year period 
covered by the financial statements and use year-to-year comparisons 
or any other format that in the registrant's judgment would enhance 
a reader's understanding.
---------------------------------------------------------------------------

    112. Does the disclosure required by Item 303(a)(3) provide useful 
information about registrants that have not yet generated revenue or 
begun operations? Would additional disclosure about these registrants, 
such as a description of their plans of operations be more useful to 
investors? If so, what additional information, if any, that is not 
already required under Item 101(a)(2) would be useful to investors? 
\351\
---------------------------------------------------------------------------

    \351\ Item 101(a)(2) requires first-time registrants that have 
not generated revenues from operations in each of the last three 
fiscal years and are offering securities to the public to provide a 
plan of operations. The item requires disclosure relating to the 
registrant's ability to fund its operations, research and 
development, anticipated material acquisition of plant and 
equipment, and any anticipated material changes in number of 
employees.
---------------------------------------------------------------------------

5. Liquidity and Capital Resources (Item 303(a)(1) and (a)(2))
    Analysis of a registrant's liquidity and capital resources is 
critical to assessing a registrant's future prospects.\352\ Item 
303(a)(1) requires a registrant to identify any known trends or any 
known demands, commitments, events or uncertainties that will result in 
or that are reasonably likely to result in the registrant's liquidity 
increasing or decreasing in any material way.\353\ If a material 
deficiency is identified, a registrant must indicate the course of 
action it has taken or proposes to take to remedy the deficiency.\354\ 
Item 303(a)(1) also requires a registrant to identify and separately 
describe its internal and external sources of liquidity and briefly 
discuss any material unused sources of liquid assets.\355\
---------------------------------------------------------------------------

    \352\ See 2003 MD&A Interpretive Release.
    \353\ Item 303(a)(1) of Regulation S-K [17 CFR 229.303(a)(1)]. 
The two-step test for disclosure of prospective information set 
forth in the 1989 MD&A Interpretive Release also applies to 
disclosure of a known trend, demand, commitment, event or 
uncertainty materially affecting liquidity and capital resources. 
See supra note 319 and accompanying text.
    \354\ Item 303(a)(1) of Regulation S-K [17 CFR 229.303(a)(1)].
    \355\ Id.
---------------------------------------------------------------------------

    Item 303(a)(2) requires discussion and analysis of a registrant's 
capital resources. A registrant must describe its material commitments 
for capital expenditures and indicate the general purpose of those 
commitments and the anticipated source of funds needed to fulfill those 
commitments.\356\ A registrant also must describe any known material 
trends, favorable or unfavorable, in its capital resources, including 
changes in equity, debt and any off-balance sheet financing 
arrangements.\357\
---------------------------------------------------------------------------

    \356\ Item 303(a)(2)(i) of Regulation S-K [17 CFR 
229.303(a)(2)(i)].
    \357\ Item 303(a)(2)(ii) of Regulation S-K [17 CFR 
229.303(a)(2)(ii)].
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter generally 
suggested requiring increased disclosure of liquidity funding 
gaps.\358\
---------------------------------------------------------------------------

    \358\ See CFA Institute.
---------------------------------------------------------------------------

b. Analysis of ``Liquidity'' and ``Capital Resources''
i. Discussion
    The Commission first adopted requirements for disclosure of 
liquidity and capital resources in 1980 to address what it viewed as a 
growing need to analyze enterprise liquidity and capital resources in 
addition to revenues and income.\359\ More recently, the Commission has 
observed that disclosure about liquidity and capital resources is 
critical to an assessment of a registrant's prospects for the future 
and even the likelihood of its survival.\360\ The Commission also has 
provided guidance regarding the type of information that a registrant 
should disclose about its liquidity and capital resources.\361\ In 
determining appropriate disclosure, registrants should evaluate 
separately their ability to meet upcoming cash requirements over both 
the short and long term.\362\ Registrants are expected to use the 
statement of cash flows and other indicators in analyzing their 
liquidity and to present a balanced discussion dealing with cash

[[Page 23947]]

flows from investing and financing activities as well as from 
operations.\363\
---------------------------------------------------------------------------

    \359\ See 1980 Form 10-K Adopting Release.
    \360\ See 2003 MD&A Interpretive Release. See also 2010 
Liquidity and Capital Resources Interpretive Release (stating that 
as financing activities undertaken by registrants become more 
diverse and complex, it is increasingly important that the 
discussion and analysis of liquidity and capital resources provided 
by registrants meet the objectives of MD&A).
    \361\ See, e.g., 1989 MD&A Interpretive Release and 2003 MD&A 
Interpretive Release.
    \362\ See id.
    \363\ See 1989 MD&A Interpretive Release.
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    Despite the Commission's guidance, the staff has observed that 
discussions of liquidity and capital resources often recite various 
changes in line items from the statement of cash flows without a 
detailed analysis. Although registrants generally discuss their 
liquidity needs and the sources of cash available to meet those needs 
as of the end of the reporting period, disclosure of known trends and 
uncertainties affecting their future needs and availability of cash 
often is less detailed.
    When adopting disclosure requirements for liquidity and capital 
resources, the Commission recognized that the terms ``liquidity'' and 
``capital resources'' lacked precision in definition but stated that 
``additional specificity would decrease the flexibility needed by 
management for a meaningful discussion.'' \364\ The Commission stated 
its intent for management to use ``whatever liquidity parameters they 
deem to be most appropriate.'' \365\ To that end, Item 303 does not 
define ``capital resources'' and defines ``liquidity'' only in general 
terms, as the ability of an enterprise to generate adequate amounts of 
cash to meet its needs for cash.\366\
---------------------------------------------------------------------------

    \364\ 1980 Form 10-K Adopting Release at 63636.
    \365\ Id. at 63636.
    \366\ Instruction 5 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)]. See also 1980 Form 10-K Adopting Release.
---------------------------------------------------------------------------

ii. Request for Comment
    113. How could we revise Item 303(a) to elicit a more meaningful 
analysis of a registrant's liquidity and capital resources while 
retaining the flexibility of registrants to analyze liquidity and 
capital resources in the context of their business and the way they 
manage liquidity?
    114. Item 303(a) provides that discussions of liquidity and capital 
resources may be combined whenever the two topics are interrelated. 
Would it lead to more useful analysis if we required registrants to 
provide separate disclosure of these two topics? Why? Would doing so 
encourage greater disclosure of trends, events and uncertainties 
affecting capital resources?
    115. When drafting MD&A, how do registrants currently interpret the 
term ``capital resources''? Would defining the term ``capital 
resources'' be helpful for registrants or, alternatively, is the plain 
meaning of the term sufficiently clear? In light of the reference to 
capital expenditures and the sources of funds needed to fulfill those 
expenditures in Item 303(a)(2)(i), do registrants currently interpret 
the term ``capital resources'' as including mostly funds committed for 
material capital expenditures and the source of those funds?
    116. Should we modify the definition of ``liquidity'' in 
Instruction 5 to Item 303(a) and, if so, how?
    117. For what periods should we require discussion and analysis of 
liquidity and capital resources and why? Should our requirements 
include more periods than what is required by the statement of cash 
flows? Why? Are developments in the most recent fiscal year sufficient 
to constitute a ``trend'' as the term is used in Item 303?
    118. Should we require registrants to provide a sensitivity 
analysis in the discussion and analysis of liquidity and capital 
resources? If so, what should be the nature of such an analysis? If 
not, why not?
    119. Should the registrant provide additional measures of intra-
period liquidity and capital resources? For example, should the 
registrant provide measures of average daily liquidity, average 
quarterly liquidity, or other measures? Should the registrant provide a 
chart or graph of intra-period liquidity? How should such information 
be considered in connection with the information provided at the end of 
the quarter?
    120. Should we consider more detailed disclosure requirements for 
liquidity, such as liquidity risks and maturity mismatches?
c. Short-Term Borrowings
i. Discussion
    Access to short-term borrowings for working capital and to fund 
operations can be an important component of a registrant's liquidity 
and capital resources.\367\ Short-term borrowings include federal funds 
purchased and securities sold under agreements to repurchase,\368\ 
commercial paper,\369\ borrowings from banks, borrowings from factors 
or other financial institutions, and any other short-term borrowings 
reflected on the registrant's balance sheet.\370\
---------------------------------------------------------------------------

    \367\ See D. Booth & J. Renier, Fed Policy in the Financial 
Crisis: Arresting the Adverse Feedback Loop, FRBD Economic Letter, 
Sept. 2009, available at https://www.dallasfed.org/assets/documents/research/eclett/2009/el0907.pdf (``Many businesses were hampered by 
the squeeze on short-term financing, a key source of working capital 
needed to prevent deeper reductions in inventories, jobs and 
wages.'').
    \368\ ASC 860-10 defines a repurchase agreement as an 
arrangement under which the transferor (repo party) transfers a 
security to the transferee (repo counterparty or reverse party) in 
exchange for cash and concurrently agrees to reacquire the security 
at a future date for an amount equal to the cash exchanged plus a 
stipulated interest factor.
    \369\ Commercial paper consists of short-term promissory notes 
issued primarily by corporations. Maturities range up to 270 days 
but average about 30 days.
    \370\ See Rules 5-19 and 9-03.13(3) of Regulation S-X [17 CFR 
210.5-19 and 210.9-03.13(3)].
---------------------------------------------------------------------------

    Short-term borrowings are common among financial institutions and 
industrial companies alike.\371\ In the last few years, low interest 
rates have prompted many non-financial registrants to take advantage of 
lower borrowing costs and use short-term borrowings to, among other 
things, buy back stock and pay off longer-term debt.\372\ For one type 
of short-term borrowing, repurchase agreements, advancements in 
technology and changes in the regulatory landscape have made it more 
efficient for parties to engage in these transactions, likely 
increasing the amount of activity in this market.\373\
---------------------------------------------------------------------------

    \371\ For example, the Federal Reserve Board reported that 
domestic outstanding commercial paper balances at the end of 
December 2015 were $174.5 billion for non-financial issuers and 
$206.6 billion for financial issuers respectively. See Commercial 
Paper Outstanding (last visited March 21, 2016) available at https://www.federalreserve.gov/releases/cp/outstanding.htm.
    \372\ See, e.g., David Randall, Fed Delay Could Spur More Debt 
Issues to Fund Share Buybacks, Reuters, Sept. 23, 2015, available at 
https://www.reuters.com/article/2015/09/23/us-usa-fed-buybacks-analysis-idUSKCN0RN0D320150923 (suggesting the Federal Reserve's 
decision to delay raising interest rates will likely encourage 
companies to incur more debt to repurchase their own shares); Serena 
Ng and Vipal Monda Companies Use Short-Term Debt to Advantage, The 
Wall Street Journal, Sept. 11, 2013, available at https://www.wsj.com/articles/SB10001424127887323893004579059473557078830 
(noting that the low cost of short-term funds due to low interest 
rates has prompted companies to engage in short-term borrowings to 
repurchase stock, fund acquisitions, pay off longer-term debt, or 
profit from the gap between short and long-term interest rates); 
John Atkins, Economy: Short-term Business Borrowing Hits Highest 
Level Since 2001, Forbes, Feb. 22, 2013, available at https://www.forbes.com/sites/spleverage/2013/02/22/economy-short-term-business-borrowing-hits-highest-level-since-2001.
    \373\ See Victoria Baklanova, Adam Copeland, and Rebeca 
McCaughrin, Reference Guide to U.S. Repo and Securities Lending 
Markets, Federal Reserve Bank of NY Staff Report, Sept. 2015, 
available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf, at 16 (noting that, while dealers appear to 
represent the largest participants in the market for repurchase 
agreements, non-dealer activity has likely increased such as through 
service providers that allow non-dealer counterparties to engage 
directly in a repurchase agreement without an intermediary).
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    Short-term borrowings can be affected, sometimes severely and 
rapidly, by illiquidity in the markets as a whole.\374\ This market 
illiquidity can

[[Page 23948]]

present increased risks to registrants who rely on short-term 
borrowings.\375\ Due to their short-term nature, a registrant's use of 
such arrangements can fluctuate significantly during a reporting 
period. As a result, presentation of period-end amounts of short-term 
borrowings alone may not accurately capture a registrant's funding 
needs or use of such borrowings during the relevant period.\376\
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    \374\ See Philip E. Strahan, Liquidity Risk and Credit in the 
Financial Crisis, FRBSF Economic Letter (May 14, 2012), available at 
https://www.frbsf.org/economic-research/publications/economic-letter/2012/may/liquidity-risk-credit-financial-crisis/. See also, Adonis 
Antoniades, Liquidity Risk and the Credit Crunch of 2007-2008: 
Evidence from Micro-Level Data on Mortgage Loan Applications, Dec. 
2014, available at https://www.bis.org/publ/work473.pdf; Marcia 
Millon Cornett, Jamie John McNutt, Philip E. Strahan, Hassan 
Tehranian, Liquidity Risk Management and Credit Supply in the 
Financial Crisis, 101 J. Fin. Econ. (2011), 297-312; Jose 
Berrospide, Bank Liquidity Hoarding and the Financial Crisis: An 
Empirical Evaluation, Federal Reserve Board Finance and Economics 
Discussion Series, Nov. 29, 2012; A. Martin et al., Repo Runs, FRBNY 
Staff Report No. 444 (Apr. 2010) (demonstrating that institutions 
funded by short-term collateralized borrowings are subject to the 
threat of runs similar to those faced by commercial banks).
    \375\ For instance, financing rates may increase or terms may 
become unfavorable, it may become more costly or impossible to roll 
over short-term borrowings, or for financial institutions, demand 
depositors may withdraw funds. See, e.g., Gary B. Gorton, Andrew 
Metrick, Lei Xie, The Flight from Maturity, Yale School of 
Management May 2015-, available at https://www.nber.org/papers/w20027.pdf.; M. Brunnermeier, Deciphering the Liquidity and Credit 
Crunch 2007-2008, 23 J. Econ. Persp. 77 (2009), at 79-80, available 
at https://www.princeton.edu/~markus/research/papers/
liquidity_credit_crunch.pdf.
    \376\ See Short-Term Borrowings Disclosure, Release No. 33-9143 
(Sept. 17, 2010) [75 FR 59866 (Sept. 28, 2010)] (``Short-Term 
Borrowings Proposing Release'').
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    Our rules require a liquidity analysis on both a long-term and 
short-term basis.\377\ The Commission has stated that registrants 
should consider describing the sources of short-term funding and the 
circumstances that are reasonably likely to affect those sources of 
liquidity.\378\ In addition, the Commission and its staff have provided 
guidance that certain registrants should disclose short-term borrowings 
to the extent relevant and material to the operations of the 
entity.\379\
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    \377\ Instruction 3 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)].
    \378\ See 2002 Commission Statement about MD&A at 3748 (``MD&A 
disclosures should not be overly general. For example, disclosure 
that the registrant has sufficient short-term funding to meet its 
liquidity needs for the next year provides little useful 
information. Instead, registrants should consider describing the 
sources of short-term funding and the circumstances that are 
reasonably likely to affect those sources of liquidity.'').
    \379\ See 2010 Liquidity and Capital Resources Interpretive 
Release at 59895 (stating that, ``if the registrant's financial 
statements do not adequately convey the registrant's financing 
arrangements during the period, or the impact of those arrangements 
on liquidity, because of a known trend, demand, commitment, event or 
uncertainty, additional narrative disclosure should be considered 
and may be required to enable an understanding of the amounts 
depicted in the financial statements''); Industry Guide 3, 
Statistical Disclosure by Bank Holding Companies (``Industry Guide 
3''), available at https://www.sec.gov/about/forms/industryguides.pdf; and Staff Accounting Bulletin, Topic 11:K 
(Application of Article 9 and Industry Guide 3), available at 
https://www.sec.gov/interps/account/sabcodet11.htm (``In the staff's 
view, Article 9 [of Regulation S-X] and Guide 3, while applying 
literally only to bank holding companies, provide useful guidance to 
certain other registrants . . . Thus, to the extent particular 
guidance is relevant and material to the operations of an entity, 
the staff believes the specified information, or comparable data, 
should be provided.'').
---------------------------------------------------------------------------

    The Commission has previously considered the applicability of 
short-term borrowing disclosure requirements for all registrants. In 
1994, in connection with the elimination of various financial statement 
disclosure schedules, the Commission eliminated a short-term borrowings 
disclosure requirement for registrants that were not bank holding 
companies.\380\ Former Rule 12-10 of Regulation S-X required those 
registrants to include with their financial statements a schedule of 
short-term borrowings that disclosed the maximum amount outstanding 
during the year, the average amount outstanding during the year, and 
the weighted-average interest rate during the period, with amounts 
broken out into specified categories of short-term borrowings.\381\ In 
proposing to eliminate this schedule, the Commission noted ``the 
disclosures concerning the registrant's liquidity and capital resources 
that are required in the MD&A would appear to be sufficiently 
informational to permit elimination of the short term borrowing 
schedule.'' \382\ In repealing Rule 12-10, the Commission ``concluded 
that the costs of furnishing the information outweigh[ed] its 
usefulness.'' \383\
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    \380\ See Financial Statements of Significant Foreign Equity 
Investees and Acquired Foreign Businesses of Domestic Issuers and 
Financial Schedules, Release No. 33-7118 (Dec. 13, 1994) [59 FR 
65632 (Dec. 20, 1994)] (``Financial Schedules Adopting Release'').
    \381\ The categories in former Rule 12-10 were amounts payable 
to: Banks for borrowings; factors or other financial institutions 
for borrowings; and holders of commercial paper.
    \382\ See Financial Statements of Significant Foreign Equity 
Investees and Acquired Foreign Businesses of Domestic Issuers and 
Financial Schedules, Release No. 33-7055 (Apr. 19, 1994) [59 FR 
21814 (Apr. 26, 1994)] at 21818.
    \383\ See Financial Schedules Adopting Release at 65635.
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    In 2010, the Commission proposed new disclosure requirements for 
short-term borrowings.\384\ When proposing these rules, the Commission 
stated its belief that they differed from former Rule 12-10 by, among 
other things, requiring short-term borrowings disclosure in MD&A, in 
tabular form, alongside a discussion and analysis to provide context 
for the quantitative data.\385\ Some commenters expressed concern about 
these proposed rules and emphasized the costs associated with 
compliance, which they asserted would outweigh the usefulness of the 
disclosure. A significant number of commenters were financial 
institutions \386\ and related organizations,\387\ with only a small 
number of investors submitting comments.\388\ While the Commission did 
not adopt these rules, there have been other regulatory actions 
relating to short-term borrowings disclosure.\389\
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    \384\ See Short-Term Borrowings Proposing Release. As proposed, 
these rules would have codified the provisions in Industry Guide 3 
for disclosure of short-term borrowings in Regulation S-K for all 
registrants. These proposed rules were intended to provide important 
information so investors could better understand the role of short-
term financing and the related risks to the registrant. At that 
time, the Commission proposed amending its MD&A requirements to 
include a new section that would provide tabular information of a 
registrant's short-term borrowings, as well as a discussion and 
analysis of these borrowings. These proposed amendments would have 
(i) expanded the Industry Guide 3 provisions for disclosure of 
short-term borrowings in Regulation S-K, (ii) required disclosure on 
an annual and quarterly basis, and (iii) expanded Industry Guide 3 
disclosure to all registrants that provide an MD&A. If the proposals 
had been adopted, the Commission would have authorized the staff to 
eliminate the corresponding provisions of Industry Guide 3 to avoid 
redundant disclosure requirements. See id. at 59868, footnote note 
21 and accompanying text.
    \385\ See id.
    \386\ See, e.g., comment letters to File No. S7-22-10 from 
Credit Suisse Group AG (Nov. 29, 2010), Barclays Bank PLC (Nov. 29, 
2010), JP Morgan Chase & Co. (Nov. 29, 2010), Morgan Stanley (Nov. 
29, 2010) and Citigroup Inc. (Nov. 29, 2010) available at https://www.sec.gov/comments/s7-22-10/s72210.shtml.
    \387\ See, e.g., comment letters to File No. S7-22-10 from the 
American Bankers Association (Nov. 29, 2010) and British Bankers' 
Associations (Dec. 1, 2010).
    \388\ See comment letters to File No. S7-22-10 from Fidelity 
Management & Research Company (Nov. 29, 2010), Doug Morgan (Sept. 
20, 2010) and Yong Zheng (Dec. 13, 2010). Fidelity supported the 
proposed requirements and recommended ``more granular disclosure on 
repo portfolios.'' Some of Fidelity's recommendations have since 
been addressed by revised FASB guidance on accounting for repurchase 
financings. Registrants currently are required to disclose 
information on transfers accounted for as sales in transactions that 
are economically similar to repurchase agreements. In addition, 
registrants must provide increased transparency about the types of 
collateral pledged in repurchase agreements and similar transactions 
accounted for as secured borrowings. See ASU 2014-11 ``Transfers and 
Servicing (Topic 860): Repurchase-to-Maturity Transactions, 
Repurchase Financings, and Disclosures.''
    \389\ See supra note 388. See also 2010 Liquidity and Capital 
Resources Interpretive Release.
---------------------------------------------------------------------------

    While a number of commenters generally supported the proposed 
rules' objectives of greater transparency of short-term borrowings as 
part of a registrant's overall liquidity profile, they also expressed 
numerous concerns about the quantitative requirements of the proposed 
rule. For example, commenters were opposed to the

[[Page 23949]]

proposed requirement to further disaggregate amounts in the table by 
currency, interest rate or other meaningful category \390\ as well as 
the proposed requirement to disclose all categories of short-term 
borrowings by eliminating a threshold for allowing aggregation into 
categories.\391\
---------------------------------------------------------------------------

    \390\ See comment letters to File No. S7-22-10 from the American 
Bar Association (Dec. 17, 2010), American Bankers Association (Nov. 
29, 2010), Barclays Bank PLC (Nov. 29, 2010), Citigroup Inc. (Nov. 
29, 2010), Cleary Gottlieb Steen & Hamilton LLP (Nov. 29, 2010), 
Chevron Corp. (Nov. 16, 2010), Credit Suisse Group AG (Nov. 29, 
2010), Institute of Management Accountants (Nov. 16, 2010), New York 
City Bar Association (Nov. 29, 2010), Regions Financial Corp. (Nov. 
29, 2010), UBS AG (Nov. 29, 2010).
    \391\ See comment letters to File No. S7-22-10 from the American 
Bankers Association (Nov. 29, 2010), Barclays Bank PLC (Nov. 29, 
2010), Cleary Gottlieb Steen & Hamilton LLP (Nov. 29, 2010), Davis 
Polk & Wardwell LLP (Nov. 29, 2010), Institute of Management 
Accountants (Nov. 16, 2010), Morgan Stanley (Nov. 29, 2010), Regions 
Financial Corp. (Nov. 29, 2010), Barclays Bank PLC (Nov. 29, 2010), 
Ford Motor Company (Nov. 29, 2010), BDO USA LLP (Nov. 22, 2010) and 
American Bar Association (Dec. 17, 2010).
    The proposed rule was a change from existing Industry Guide 3 
instructions, which allows categories of short-term borrowings to be 
aggregated where they do not exceed thirty percent of the company's 
stockholders' equity at the end of the period. Instruction to Item 
VII of Industry Guide 3.
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ii. Request for Comment
    121. Do current disclosure requirements under Item 303 elicit 
adequate disclosure of a registrant's reliance on short-term 
borrowings?
    122. Should we revise Item 303 to require specific line-item 
disclosure of a registrant's use and analysis of short-term borrowings 
as a source of funding? Are there aspects of the 2010 proposal we 
should revisit? Would doing so lead to any additional disclosure or 
analysis that registrants do not already provide under current 
requirements and guidance? Should we consider other qualitative or 
quantitative measures for disclosure of short-term borrowings? If so, 
what measures should we consider?
    123. Should we consider different disclosure requirements for 
financial institutions versus non-financial institutions? If so, which 
disclosure should we require and why?
    124. Should we require registrants to provide chart or graph of its 
short-term borrowings?
6. Off-Balance Sheet Arrangements (Item 303(a)(4))
    Item 303(a)(4) requires, in a separately-captioned section, 
disclosure of a registrant's off-balance sheet arrangements that have 
or are reasonably likely to have a current or future effect on a 
registrant's financial condition, changes in financial condition, 
revenues or expenses, results of operations, liquidity, capital 
expenditures or capital resources that is material to investors.\392\ 
To the extent necessary to an understanding of such arrangements and 
effect, registrants must disclose the following items and such other 
information that the registrant believes is necessary for such an 
understanding:
---------------------------------------------------------------------------

    \392\ Item 303(a)(4) of Regulation S-K [17 CFR 229.303(a)(4)].
---------------------------------------------------------------------------

     The nature and business purpose of such off-balance sheet 
arrangements;
     the importance to the registrant of such off-balance sheet 
arrangements in respect of its liquidity, capital resources, market 
risk support, credit risk support or other benefits;
     the amounts of revenues, expenses and cash flows arising 
from such arrangements; the nature and amounts of any interests 
retained, securities issued and other indebtedness incurred in 
connection with such arrangements; and the nature and amounts of any 
other obligations or liabilities (including contingent obligations or 
liabilities) of the registrant arising from such arrangements that are 
or are reasonably likely to become material and the triggering events 
or circumstances that could cause them to arise; and
     any known event, demand, commitment, trend or uncertainty 
that will result in or is reasonably likely to result in the 
termination, or material reduction in availability of a registrant's 
off-balance sheet arrangements that provide material benefits, and the 
course of action that the registrant has taken or proposes to take in 
response to any such circumstances.
    Item 303(a)(4)(ii) defines off-balance sheet arrangements as 
certain guarantees, retained or contingent interests in assets 
transferred to an unconsolidated entity, obligations under certain 
derivative instruments,\393\ and variable interests in an 
unconsolidated entity.
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    \393\ For registrants whose financial statements are prepared in 
accordance with U.S. GAAP, the definition includes a contract that 
would be accounted for as a derivative instrument, except that it is 
both indexed to the registrant's own stock and classified in the 
registrant's statement of stockholders' equity. See ASC 815-10-15-
74. For other registrants, the definition includes derivative 
instruments that are both indexed to the registrant's own stock and 
classified in stockholders' equity, or not reflected, in the 
company's statement of financial position.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. One commenter stated that disclosure of off-balance 
sheet arrangements was redundant with financial statement disclosure 
requirements.\394\
---------------------------------------------------------------------------

    \394\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. A few commenters stated that 
disclosure of off-balance sheet arrangements was redundant of 
disclosure in the financial statements.\395\ These commenters suggested 
either eliminating this requirement or expressly allowing registrants 
to cross-reference to the disclosure in the financial statements. One 
of these commenters also noted that disclosures under this item are 
``generally boilerplate and/or redundant'' and recommended a more 
``principles-based'' approach to this disclosure.\396\ One commenter 
listed off-balance sheet disclosure as ``some of the most challenging 
disclosures'' that could be improved.\397\
---------------------------------------------------------------------------

    \395\ See, e.g., CCMC, SCSGP, ABA 1, and ABA 2.
    \396\ See ABA 1. For example, this commenter suggested requiring 
registrants to disclose the potential impact on the registrant of 
the acceleration or increase of material off-balance sheet 
arrangements.
    \397\ See CFA Institute. This commenter did not provide specific 
recommendations on how to improve this disclosure.
---------------------------------------------------------------------------

b. Discussion
    The Sarbanes-Oxley Act required the Commission to adopt rules 
providing that each annual and quarterly financial report required to 
be filed with the Commission must include disclosure about off-balance 
sheet arrangements.\398\ Earlier in 2002, prior to enactment of the 
Sarbanes-Oxley Act, the Commission issued a statement on the 
desirability of enhanced disclosure in MD&A of off-balance sheet 
arrangements.\399\ Much of the language and many of the concepts in the 
Sarbanes-Oxley Act were consistent with the language and concepts in 
this Commission statement.\400\
---------------------------------------------------------------------------

    \398\ Section 401(a) of the Sarbanes-Oxley Act added Section 
13(j) to the Exchange Act [15 U.S.C. 78m(j)], which directed the 
Commission to adopt rules requiring each annual and quarterly 
financial report filed with the Commission to disclose ``all 
material off-balance sheet transactions, arrangements, obligations 
(including contingent obligations), and other relationships of the 
issuer with unconsolidated entities or other persons, that may have 
a material current or future effect on financial condition, changes 
in financial condition, results of operations, liquidity, capital 
expenditures, capital resources, or significant components of 
revenues or expenses.''
    \399\ See 2002 Commission Statement about MD&A.
    \400\ See id. See also Disclosure in Management's Discussion and 
Analysis About Off-Balance Sheet Arrangements, Contractual 
Obligations and Contingent Liabilities and Commitments, Release No. 
33-8144, Nov. 4, 2002 [67 FR 68054 (Nov. 8, 2002)] (``Off-Balance 
Sheet and Contractual Obligations Proposing Release'').
---------------------------------------------------------------------------

    In its 2002 statement, the Commission noted that off-balance sheet 
arrangements often are integral to both liquidity and capital resources 
and that registrants should ``consider all of these items together, as 
well as individually,''

[[Page 23950]]

when drafting MD&A disclosure.\401\ The Commission further noted that 
off-balance sheet arrangements and transactions with unconsolidated, 
limited purpose entities should be discussed pursuant to Item 303(a) 
when they are ``reasonably likely to affect materially liquidity or the 
availability of or requirements for capital resources.'' \402\
---------------------------------------------------------------------------

    \401\ See 2002 Commission Statement about MD&A at 3748.
    \402\ See id. at 3748.
---------------------------------------------------------------------------

    The 2002 statement was consistent with Commission rules and 
guidance existing at the time. For example, Item 303(a)(2)(ii) 
specifically required registrants to disclose off-balance sheet 
financing arrangements in their discussion of capital resources.\403\ 
Similarly, the 1989 MD&A Interpretive Release indicated that a 
registrant's discussion of long-term liquidity and long-term capital 
resources must address demands or commitments, including any off-
balance sheet items.\404\
---------------------------------------------------------------------------

    \403\ Item 303(a)(2)(ii) of Regulation S-K [17 CFR 
229.303(a)(2)(ii)]. The item specifies that the discussion shall 
consider changes between equity, debt and any off-balance sheet 
financing arrangements.
    \404\ See 1989 MD&A Interpretive Release at 22431 (``The 
discussion of long-term liquidity and long-term capital resources 
must address material capital expenditures, significant balloon 
payments or other payments due on long-term obligations, and other 
demands or commitments, including any off-balance sheet items, to be 
incurred beyond the next 12 months, as well as the proposed sources 
of funding required to satisfy such obligations.'').
---------------------------------------------------------------------------

    In response to the Sarbanes-Oxley Act, the Commission adopted more 
specific disclosure requirements for off-balance sheet arrangements in 
2003.\405\ When adopting these rules, the Commission reiterated that, 
while only one item in its MD&A rules specifically identifies off-
balance sheet arrangements,\406\ other requirements ``clearly require 
disclosure of off-balance sheet arrangements if necessary to an 
understanding of a registrant's financial condition, changes in 
financial condition or results of operations.'' \407\ The new rules 
were intended to clarify the disclosures that registrants must make 
about off-balance sheet arrangements and required registrants to 
provide those disclosures in a separately designated section of 
MD&A.\408\
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    \405\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release.
    \406\ Item 303(a)(2)(ii) of Regulation S-K [17 CFR 
229.303(a)(2)(ii)].
    \407\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release at 5983.
    \408\ See id.
---------------------------------------------------------------------------

    In 2004, as part of a broader effort to expand the events that 
registrants must report on a current basis, the Commission adopted 
additional requirements for disclosing off-balance sheet arrangements 
on Form 8-K.\409\ These new provisions of Form 8-K, which remain in 
effect today, require registrants to file a report upon the creation of 
a direct financial obligation or an obligation under an off-balance 
sheet arrangement (Item 2.03) and to file a report if a triggering 
event occurs that causes the increase or acceleration of a such an 
obligation and the consequences of the event are material to the 
registrant (Item 2.04).\410\ While the Form 8-K requirements rely on 
the definition of ``off-balance sheet arrangement'' in Item 
303(a)(4)(ii), the substance of the disclosure is different. Unlike 
Item 303(a)(4), Form 8-K does not require registrants to provide an 
analysis of off-balance sheet arrangements or their importance to the 
registrant.
---------------------------------------------------------------------------

    \409\ See 2004 Form 8-K Adopting Release.
    \410\ 17 CFR 249.308.
---------------------------------------------------------------------------

    In the proposing release for Item 303(a)(4), the Commission 
recognized that parts of the proposed off-balance sheet disclosure 
requirements might overlap with disclosure presented in the footnotes 
to the financial statements. The Commission stated that the proposed 
rules were designed to provide more comprehensive information and 
analysis in MD&A than what was provided in the footnotes.\411\
---------------------------------------------------------------------------

    \411\ See Off-Balance Sheet and Contractual Obligations 
Proposing Release.
---------------------------------------------------------------------------

    Since the adoption of Item 303(a)(4), the FASB has issued 
additional requirements that further overlap with this item.\412\ 
Currently, U.S. GAAP requires disclosure about transactions or 
arrangements that overlap with Item 303(a)(4)'s definition of off-
balance sheet arrangements. For example, U.S. GAAP requires disclosure 
in the notes to the financial statements of the nature and amount of a 
guarantee,\413\ retained or contingent interests in assets transferred 
to unconsolidated entities,\414\ pertinent information of derivative 
instruments that are classified as stockholder's equity under U.S. 
GAAP,\415\ and obligations under variable interests in unconsolidated 
entities.\416\
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    \412\ In June 2009, the FASB issued SFAS No. 166, Accounting for 
Transfers of Financial Assets an amendment of FASB Statement No. 
140, which requires enhanced disclosures about transfers of 
financial assets and a transferor's continuing involvement with 
transfers of financial assets accounted for as sales. Also in June 
2009, the FASB issued SFAS No. 167, Amendments to FASB 
Interpretation No. 46(R), which requires enhanced disclosures about 
an enterprise's involvement in a variable interest entity, including 
unconsolidated entities. SFAS No. 166 and 167 have been codified as 
ASC Topics 860 (Transfers and Servicing) and 810 (Consolidation), 
respectively.
    \413\ See ASC 460-10-50.
    \414\ See ASC 860-10-50-3, ASC 860-20-50.
    \415\ See ASC 815-40-50-5, ASC 505-10-50.
    \416\ See ASC 810-10-50-4.
---------------------------------------------------------------------------

    Because of this overlap, in response to Item 303(a)(4), registrants 
often provide cross-references to the relevant notes to their financial 
statements or provide disclosure that is duplicative of information in 
the notes. While many of the requirements in Item 303(a)(4) overlap 
with U.S. GAAP, some of the requirements related to the location, 
presentation and nature of the disclosure are not the same. 
Additionally, Item 303(a)(4) disclosure is not audited.
    Location of Disclosure. In its 2002 statement, the Commission 
observed that investors will often find information relating to a 
particular matter more meaningful if it is disclosed in a single 
location, rather than presented in a fragmented manner throughout the 
filing.\417\ In proposing the off-balance sheet disclosure 
requirements, the Commission identified as one of its objectives to 
provide investors with information necessary to understand a 
registrant's off-balance sheet arrangements that are neither readily 
apparent nor easily understood from reading the financial statements 
alone.\418\
---------------------------------------------------------------------------

    \417\ See 2002 Commission Statement about MD&A.
    \418\ See Off-Balance Sheet and Contractual Obligations 
Proposing Release.
---------------------------------------------------------------------------

    Item 303(a)(4)(i) specifies that off-balance sheet arrangements 
should be discussed in a separately-captioned section. The instructions 
to Item 303(a)(4) permit that discussion to cross-reference to 
information provided in the footnotes to the financial statements, 
rather than repeat it, provided that the MD&A disclosure integrates the 
substance of the footnotes in a manner designed to inform readers of 
the significance of the information that is cross-referenced.\419\ By 
contrast, U.S. GAAP does not prescribe the location of these 
disclosures, which may be dispersed throughout the notes to the 
financial statements. However, interactive data allows investors to 
isolate disclosures about off-balance sheet arrangements even when it 
is dispersed within the notes to the financial statements.
---------------------------------------------------------------------------

    \419\ Instruction 5 to Item 303(a)(4) of Regulation S-K [17 CFR 
229.303(a)(4)].
---------------------------------------------------------------------------

    Presentation of Disclosure. Item 303(a)(4) requires disclosure for 
the most recent period and a discussion of changes from the previous 
year where necessary to an understanding of the disclosure.\420\ U.S. 
GAAP does not

[[Page 23951]]

require discussion of changes from the previous year.
---------------------------------------------------------------------------

    \420\ Instruction 4 to Item 303(a)(4) [17 CFR 229.303(a)(4)].
---------------------------------------------------------------------------

    Nature of Disclosures. While Item 303(a)(4) and U.S. GAAP both 
require disclosure of the nature and amounts associated with off-
balance sheet arrangements, Regulation S-K requires additional 
disclosure about the business purpose of the off-balance sheet 
arrangement \421\ and the importance of the off-balance sheet 
arrangement to the registrant's liquidity, capital resources, market 
risk support, credit risk support, and other benefits.\422\ Item 
303(a)(4) also requires disclosure of any known event, demand, 
commitment, trend, or uncertainty that will result in or is reasonably 
likely to result in the termination or material reduction in the 
availability of material off-balance sheet arrangements to the 
registrant and the course of action the registrant has taken or 
proposes to take to address such circumstances. U.S. GAAP does not 
require this disclosure.
---------------------------------------------------------------------------

    \421\ Item 303(a)(4)(i)(A) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(A)].
    \422\ Item 303(a)(4)(i)(B) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(B)].
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c. Request for Comment
    125. Does Item 303(a)(4) elicit disclosure that is important to 
investors? Is this information otherwise available in Commission 
filings?
    126. If we retain the disclosure requirements in Item 303(a)(4), 
should we expand the disclosure required by this item? If so, what 
additional disclosure would be important to investors and why? For 
example, should we revise our rules to require registrants to analyze 
the risks and financial potential associated with its off-balance sheet 
arrangements?
    127. If we retain the disclosure requirements in Item 303(a)(4), 
should this information be located in MD&A, the notes to the financial 
statements, or both? Is the location of the disclosure important? Are 
there challenges associated with auditing this information?
    128. If we eliminate Item 303(a)(4), do the other requirements in 
Item 303 and the requirements in U.S. GAAP require adequate disclosure 
in terms of the location, presentation and nature of information about 
off-balance sheet arrangements? Would eliminating Item 304(a)(4) result 
in costs to investors?
    129. In the adopting release for Item 303(a)(4), the Commission 
noted that ``[t]he MD&A rules already require disclosure regarding off-
balance sheet arrangements and other contingencies.'' \423\ Do the 
disclosure requirements in Item 303 regarding liquidity and capital 
resources require adequate disclosure about matters that will result in 
or is reasonably likely to result in the termination or material 
reduction in the availability of material off-balance sheet 
arrangements to the registrant and the course of action the registrant 
has taken or proposes to take to address such circumstances?
---------------------------------------------------------------------------

    \423\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release at 5982.
---------------------------------------------------------------------------

    130. Should we require additional disclosure of off-balance sheet 
arrangements that occurred during a reporting period, such as an 
exhibit identifying all such arrangements?
7. Contractual Obligations (Item 303(a)(5))
    Item 303(a)(5) requires tabular disclosure of a registrant's known 
contractual obligations for long-term debt, capital leases, operating 
leases, purchase obligations and other long-term liabilities reflected 
on the registrant's balance sheet under U.S. GAAP.\424\ The Commission 
has defined the first three categories of obligations (long-term debt, 
capital leases and operating leases) by reference to the relevant U.S. 
GAAP accounting pronouncements that require disclosure of these 
obligations in the financial statements or notes thereto.\425\
---------------------------------------------------------------------------

    \424\ 17 CFR 229.303(a)(5) of Regulation S-K [17 CFR 
229.303(a)(5)].
    \425\ Item 303(a)(5)(ii) of Regulation S-K [17 CFR 
229.303(a)(5)(ii)] (referring to ASC Topics 470-10-50-1 and 840 in 
defining the terms ``long-term debt obligation,'' ``capital lease 
obligation'' and ``operating lease obligation'').
---------------------------------------------------------------------------

    For purchase obligations, the Commission defined this term as an 
agreement to purchase goods or services that is enforceable, legally 
binding on the registrant and specifies all significant terms.\426\ The 
Commission stated that the definition of ``purchase obligations'' is 
designed to capture the registrant's capital expenditures for purchases 
of goods or services over a five-year period.\427\ Some purchase 
obligations are executory contracts, and therefore are not recognized 
as liabilities in accordance with U.S. GAAP.\428\
---------------------------------------------------------------------------

    \426\ Item 303(a)(5)(ii) of Regulation S-K [17 CFR 
229.303(a)(5)(ii)].
    \427\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release.
    \428\ See id.
---------------------------------------------------------------------------

    The fifth category of contractual obligations, ``Other Long-Term 
Liabilities Reflected on the Registrant's Balance Sheet under GAAP,'' 
captures all other long-term liabilities that are reflected on the 
registrant's balance sheet under the registrant's applicable U.S. GAAP. 
Common examples of other obligations disclosed in this line-item of the 
table include postretirement benefits, interest on debt, and tax 
liabilities for uncertain tax positions.
    Item 303(a)(5) requires registrants to disclose the amounts of 
payments due by specified time periods, aggregated by the type of 
contractual obligation.\429\ Registrants must disclose payments due in 
less than 1 year, 1-3 years, 3-5 years and more than 5 years, as well 
as the total, aggregate amount of obligations in each category. Amounts 
are required to be set forth in the aggregate and there is no 
materiality qualifier.
---------------------------------------------------------------------------

    \429\ Item 303(a)(5)(i) of Regulation S-K. Registrants may 
disaggregate the categories specified in the item and use other 
categories suitable to their businesses, so long as the presentation 
includes all of the registrant's obligations that fall within the 
specified categories.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter called for 
improvements in the ability to contextualize the table of contractual 
obligations, but did not provide additional details.\430\ Another 
commenter recommended that we add an instruction to Item 303(a)(5) 
indicating that, to the extent disclosure in response to the item is 
included in the notes to the financial statements, registrants should 
use cross-references to avoid duplicative disclosure.\431\
---------------------------------------------------------------------------

    \430\ See CFA Institute.
    \431\ See ABA 2.
---------------------------------------------------------------------------

b. Discussion
    In response to a 2001 petition for an interpretive release,\432\ 
the Commission issued a statement in 2002 recommending that registrants 
present information about contractual obligations and commercial 
commitments in a single location within the filing.\433\ The statement 
included a recommended table of contractual obligations resembling that 
of current Item 303(a)(5).\434\ This recommended table became a line-
item requirement when the Commission adopted Item 303(a)(5) in 
2003.\435\
---------------------------------------------------------------------------

    \432\ See Petition for Issuance of Interpretive Release 
Concerning MD&A under Regulation S-K, Item 303, (Dec. 31, 2001), 
available at https://www.sec.gov/rules/petitions/petndiscl-12312001.htm.
    \433\ See 2002 Commission Statement about MD&A.
    \434\ See id. The recommended table included long-term debt, 
capital lease and operating lease obligations and covered similar 
periods.
    \435\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release.
---------------------------------------------------------------------------

    When adopting Item 303(a)(5), the Commission recognized that much 
of the disclosure required by this item is addressed under U.S. GAAP 
requirements.\436\ Similarly, disclosure

[[Page 23952]]

about other obligations not required by U.S. GAAP, ``such as purchase 
contracts, may or may not be disclosed, but if disclosed, it is usually 
dispersed throughout the filing and may not be presented in a 
consistent manner among registrants.'' \437\
---------------------------------------------------------------------------

    \436\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release at 5986 (``The preparation of financial statements in 
accordance with GAAP already requires registrants to assess payments 
under all of the above categories of contractual obligations, except 
for purchase obligations.'').
     Item 303(a)(5) directly refers to ASC Topics in defining three 
of the five required categories of contractual obligations that must 
be included within the table. See supra note 425 and accompanying 
text.
    \437\ See Off-Balance Sheet and Contractual Obligations Adopting 
Release at 5990.
---------------------------------------------------------------------------

    By providing aggregated information of contractual obligations in a 
single location and appropriate context for investors to assess the 
impact of off-balance sheet arrangements with respect to liquidity and 
capital resources, Item 303(a)(5) was intended to improve transparency 
of a registrant's short- and long-term liquidity and capital resource 
needs. This disclosure was also intended to ``improve an investor's 
ability to compare registrants.'' \438\
---------------------------------------------------------------------------

    \438\ Id. at 5990.
---------------------------------------------------------------------------

    The Commission has issued guidance on Item 303(a)(5) on one 
occasion since its adoption.\439\ In a 2010 interpretive release, the 
Commission noted that registrants and industry groups had raised 
questions about how to treat a number of items under the contractual 
obligations requirement, including: interest payments, repurchase 
agreements, tax liabilities, synthetic leases, and obligations that 
arise under off-balance sheet arrangements.\440\ Because the questions 
tended to be fact-specific and closely related to a registrant's 
particular business and circumstances, the Commission declined to 
provide specific guidance about these items or the presentation of the 
contractual obligations table. Instead, the Commission noted that the 
requirement itself permits flexibility and encouraged registrants to 
develop a presentation method that is clear, understandable and 
appropriately reflects the categories of obligations that are 
meaningful in light of its capital structure and business.\441\
---------------------------------------------------------------------------

    \439\ In the 2003 MD&A Interpretive Release, the Commission 
stated that it was not addressing specifically disclosures of 
contractual obligations because it had had little experience with 
companies' application of the new rule, adopted a few months 
earlier. Nevertheless, the Commission noted that the overall 
guidance in the 2003 MD&A Interpretive Release is applicable to all 
MD&A discussions. See 2003 MD&A Interpretive Release.
    \440\ See 2010 Liquidity and Capital Resources Interpretive 
Release.
    \441\ See id. The Commission noted that the staff has observed 
that divergent practices have developed in connection with Item 
303(a)(5) disclosure, with registrants drawing different conclusions 
about the information to be included in the table, but also 
acknowledged that the rule permits flexibility so the presentation 
can reflect company-specific information suitable to a company's 
business.
---------------------------------------------------------------------------

    The Commission's guidance also explained that tabular disclosure of 
contractual obligations should be prepared with the goal of presenting 
a meaningful snapshot of cash requirements arising from contractual 
payment obligations. Registrants were instructed to highlight any 
changes in presentation that are made so that investors may use the 
information to make comparisons from period to period. The Commission 
suggested that footnotes should be used to provide information 
necessary for an understanding of the timing and amount of specified 
contractual obligations. Registrants also should consider additional 
narrative discussion outside of the table to promote understanding of 
the tabular data.\442\ In practice, however, registrants typically do 
not include additional narrative with their contractual obligations 
table.
---------------------------------------------------------------------------

    \442\ See id.
---------------------------------------------------------------------------

c. Request for Comment
    131. Does the table of contractual obligations present a meaningful 
snapshot of a registrant's cash requirements for contractual 
obligations? How could the format of the disclosure in the table be 
improved? Should we consider an alternative presentation or format for 
this disclosure?
    132. Should we require narrative disclosure to accompany the 
tabular disclosure? For example, should we require registrants to 
discuss how they plan to meet current and future obligations disclosed 
in the table? If so, what additional narrative disclosure would be 
useful to investors?
    133. Item 303(a)(5) was intended to provide aggregated information 
of contractual obligations in a single location and appropriate context 
for investors to assess the impact of off-balance sheet arrangements 
with respect to liquidity and capital resources. Would narrative 
disclosure improve readers' ability to compare registrants by 
reconciling the information in the table to information elsewhere in 
MD&A and financial statements? Should comparability among registrants 
continue to be a goal? Should we continue to require this disclosure in 
a single location or is disclosure elicited under U.S. GAAP, in various 
parts of a registrant's filings, sufficient?
    134. Item 303(a)(5) requires disclosure of five categories of 
contractual obligations. Should we expand the rule to include other 
categories of contractual obligations and if so, what categories should 
we consider?
    135. Would additional guidance or instructions about how to treat 
certain types of obligations, such as interest payments, repurchase 
agreements or tax liabilities, be helpful to registrants in preparing 
this disclosure? Would such guidance limit the intended flexibility of 
the rule?
    136. In the 2010 Liquidity and Capital Resources Interpretive 
Release, the Commission suggested that separating amounts in the table 
into those that are reflected on the balance sheet and those arising 
from off-balance arrangements might be useful to a clear understanding 
of the information presented. Should we revise Item 303(a)(5) to 
require registrants to separate amounts in the table of contractual 
obligations into those that are reflected on the balance sheet and 
those arising from off-balance sheet arrangements? Should we require 
this disclosure pursuant to some threshold amount?
8. Critical Accounting Estimates
    A registrant's results of operations, financial condition, and 
changes to financial condition often depend on estimates involved in 
applying accounting policies that entail uncertainties and 
subjectivity. Critical accounting estimates are those accounting 
judgments and estimates that relate to the items that are material to 
the financial statements, taken as a whole, and that management 
believes are most critical--that is, those that are most important to 
portraying the registrant's financial condition and results and require 
management's most difficult, subjective or complex judgments.\443\ 
While U.S. GAAP requires financial statement footnote disclosure about 
accounting policies,\444\ Item 303 requires disclosure of trends, 
events or uncertainties known to management that could materially 
affect reported financial information. Item 303 does not specifically 
address critical accounting estimates.
---------------------------------------------------------------------------

    \443\ See Accounting Policies; Cautionary Advice Regarding 
Disclosure, Release No. 33-8040 (Dec. 12, 2001) [66 FR 65013 (Dec. 
17, 2001)] (``Cautionary Advice Release'').
    \444\ See ASC Topic 235-10-50-1.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended 
amending Item 303 to require disclosure about management's significant

[[Page 23953]]

judgments and assumptions underlying its use of critical accounting 
estimates.\445\ This commenter also recommended amending Item 303 to 
explain that the disclosure about critical accounting estimates 
required in MD&A is meant to supplement, not duplicate, the information 
provided in the notes to the financial statements.\446\ In addition, 
this commenter suggested that we consider whether requiring independent 
auditor negative assurance would enhance the quality of the recommended 
disclosures by imposing more rigor in its preparation.\447\ Another 
commenter recommended that the Commission work with accounting 
standard-setters to improve financial statement presentation and 
related disclosures, such as estimates, judgments and choices.\448\ One 
commenter also suggested that the Commission work with the auditing 
profession to eliminate descriptions of recent accounting changes for 
pronouncements that have no effect on a registrant.\449\ Another 
commenter recommended that the Commission coordinate with the FASB to 
review and clarify the disclosure objectives of critical accounting 
estimates in MD&A and significant accounting policies in the financial 
statements to determine whether they provide distinct and useful 
information and provide guidance on how both requirements should work 
best.\450\
---------------------------------------------------------------------------

    \445\ See ABA 1.
    \446\ See id. See also ABA 2. The Commission has also stated 
that critical accounting estimates should supplement and not 
duplicate the description of accounting policies in the notes to the 
financial statements. See, e.g., 2003 MD&A Interpretive Release.
    \447\ See ABA 1.
    \448\ See CFA Institute.
    \449\ See A. Radin.
    \450\ See SCSGP.
---------------------------------------------------------------------------

b. Discussion
    In 2001, the Commission encouraged registrants to explain in their 
MD&A the judgments and uncertainties affecting the application of their 
critical accounting policies, as well as the likelihood that materially 
different amounts would be reported under different conditions or using 
different assumptions.\451\ The Commission also stated its intent to 
consider new rules to elicit more precise disclosures about the 
critical accounting policies.\452\
---------------------------------------------------------------------------

    \451\ See Cautionary Advice Release. The Commission alerted 
registrants to the need for greater investor awareness of the 
sensitivity of financial statements to the methods, assumptions and 
estimates underlying their preparation and stated that the objective 
of this disclosure is consistent with the objective of MD&A.
    \452\ See id.
---------------------------------------------------------------------------

    In 2002, the Commission proposed new rules that would have 
required, among other things, disclosure of accounting estimates 
resulting from the application of critical accounting policies.\453\ 
The proposed rules would have defined a ``critical accounting 
estimate'' as an accounting estimate that meets the following two 
criteria: (i) The accounting estimate must require the registrant to 
make assumptions about matters that are highly uncertain at the time 
the accounting estimate is made; and (ii) it must be the case that 
different estimates that the registrant reasonably could have used for 
the accounting estimate in the current period, or changes in the 
accounting estimate that are reasonably likely to occur from period to 
period, would have a material impact on the presentation of the 
registrant's financial condition, changes in financial condition or 
results of operations.\454\ As proposed, registrants would have been 
required to:
---------------------------------------------------------------------------

    \453\ See Disclosure in Management's Discussion and Analysis 
about the Application of Critical Accounting Policies, Release No. 
33-8098 (May 10, 2002) [67 FR 35620 (May 20, 2002)] (``Critical 
Accounting Proposing Release''). The Commission also proposed rules 
requiring a registrant that has initially adopted an accounting 
policy with a material impact on its financial presentation to 
disclose information that includes: what gave rise to the initial 
adoption; the impact of the adoption; the accounting principle 
adopted and method of applying it; and the choices it had among 
accounting principles. See id.
    \454\ See id.
---------------------------------------------------------------------------

     Describe the critical accounting estimates (including the 
methodology underlying each critical accounting estimate, assumptions 
about highly uncertain matters and other assumptions that are material) 
and identify where and how they affect the registrant's reported 
financial results, financial condition and changes in financial 
condition; \455\
---------------------------------------------------------------------------

    \455\ Disclosure would have been required, if applicable, 
regarding why the accounting estimate was reasonably likely to 
change in future periods with a material impact on the registrant's 
financial presentation. In certain situations, disclosures would 
have been required for individual segments of the registrant's 
business.
---------------------------------------------------------------------------

     provide a better understanding of the sensitivity of the 
reported operating results and financial condition to changes in the 
critical accounting estimates or their underlying assumptions; \456\ 
and
---------------------------------------------------------------------------

    \456\ More specifically, the rules would have required, for each 
critical accounting estimate, discussion of changes that would 
result either from (i) making reasonably possible, near-term changes 
in the most material assumptions underlying the estimate, or (ii) 
using in place of the recorded estimate the ends of the range of 
reasonably possible amounts that the registrant likely determined 
when formulating its recorded estimate.
---------------------------------------------------------------------------

     state whether or not senior management discussed the 
development, selection and disclosure of those critical accounting 
estimates with the registrant's audit committee.\457\
---------------------------------------------------------------------------

    \457\ See Critical Accounting Proposing Release.
---------------------------------------------------------------------------

    The Commission did not adopt these rules, but subsequently provided 
interpretive guidance on disclosure of critical accounting 
estimates.\458\ In the 2003 MD&A Interpretive Release, the Commission 
stated that registrants should provide disclosure about critical 
accounting estimates or assumptions in MD&A where:
---------------------------------------------------------------------------

    \458\ This interpretive guidance was provided based on the 
Division staff's review of registrant disclosures, including its 
Fortune 500 review. The Commission concluded that additional 
guidance would be especially useful in a few areas of MD&A, 
including disclosure of critical accounting estimates. See 2003 MD&A 
Interpretive Release.
---------------------------------------------------------------------------

     The nature of the estimates or assumptions is material due 
to the levels of subjectivity and judgment necessary to account for 
highly uncertain matters or the susceptibility of such matters to 
change; and
     the impact of the estimates and assumptions on financial 
condition or operating performance is material.\459\
---------------------------------------------------------------------------

    \459\ See id.

The Commission also clarified that this disclosure should supplement, 
not duplicate, the description of accounting policies that are already 
disclosed in the notes to the financial statements.\460\ While 
accounting policy notes in the financial statements generally describe 
the method used to apply an accounting principle, the discussion in 
MD&A should present a registrant's analysis of the uncertainties 
involved in applying the principle.\461\
---------------------------------------------------------------------------

    \460\ See id. The Commission further stated that ``[e]qually 
important, companies should address the questions that arise once 
the critical accounting estimate or assumption has been identified, 
by analyzing, to the extent material, such factors as how they 
arrived at the estimate, how accurate the estimate/assumption has 
been in the past, how much the estimate/assumption has changed in 
the past, and whether the estimate/assumption is reasonably likely 
to change in the future.'' See id. at 75065.
    The FASB has also stated that distinguishing between a change in 
an accounting principle and a change in an accounting estimate is 
sometimes difficult, and in some cases, a change in accounting 
estimate is effected by a change in accounting principle. See ASC 
Topic 250-10-45-18.
    \461\ See 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------

    Despite Commission guidance, many registrants repeat the discussion 
of significant accounting policies from the notes to the financial 
statements in their discussion of critical accounting estimates in MD&A 
and provide limited additional discussion of the critical accounting 
estimates. We are seeking public input on how to revise our 
requirements to improve the discussion of critical accounting estimates 
in MD&A.

[[Page 23954]]

c. Request for Comment
    137. Should we revise Item 303 to require disclosure about critical 
accounting estimates? If so, what information would be important to 
investors?
    138. Should we define ``critical accounting estimates''? If so, 
should the definition be based on our 2001 guidance,\462\ the 
definition proposed in 2002,\463\ or something else? Why? Are there any 
other elements to a ``critical accounting estimate'' that have not been 
captured in prior definitions?
---------------------------------------------------------------------------

    \462\ See Cautionary Advice Release.
    \463\ See Critical Accounting Proposing Release.
---------------------------------------------------------------------------

    139. Why do registrants repeat the discussion of accounting 
policies presented in the notes to the financial statements? How can we 
encourage registrants to eliminate repetition in MD&A of the discussion 
of accounting policies provided in the notes to the financial 
statements?
    140. Do registrants find the guidance for disclosing critical 
accounting estimates from the 2003 MD&A Interpretive Release helpful in 
determining whether such disclosure is required? Would it be helpful 
for registrants if we incorporated this or other elements of our 
guidance on critical accounting estimates into Regulation S-K?
    141. Should we revise our requirements to elicit more comparable 
disclosure among registrants? If so, how? Should we adopt prescriptive 
requirements relating to critical accounting estimates? Are there any 
accounting estimates common to a particular industry that are 
``critical'' to all participants in that industry?
    142. Should we require the disclosure of management's judgments and 
estimates that form the basis for MD&A disclosure? For example, should 
we require registrants to disclose the quantitative and qualitative 
factors that form its assessment of materiality? Should we require 
registrants to disclose how they assessed materiality?
    143. Should we require management to disclose the nature of its 
assessment of errors that it determined to be immaterial and therefore 
were not corrected?
    144. Should we require disclosure of other critical accounting 
estimates, such as those that impact other metrics or measures, such as 
the number of new customers or the number of subscribers?

C. Risk and Risk Management

    Disclosure of a registrant's most significant risks provides 
investors with important context for assessing the registrant's 
financial potential. Risk-related disclosure is required by multiple 
items of Regulation S-K and certain financial reporting 
requirements.\464\ In this section, we focus on:
---------------------------------------------------------------------------

    \464\ Although we focus on Items 503(c) and 305 of Regulation S-
K, risk-related disclosure may be provided in response to other 
requirements, such as Items 101(d)(3) (risk attendant to foreign 
operations), 103 (legal proceedings), or 303 (MD&A). For financial 
reporting requirements, risk-related disclosure may be included in 
the financial statements in response to ASC Topics 275 (risks and 
uncertainties), 450 (contingencies), or 825 (financial instruments), 
among others. The staff is separately considering Items 101(d)(3) 
and 103 in developing recommendations for the Commission for 
potential changes to update or simplify certain disclosure 
requirements. For a description of this project, see Section I. For 
a discussion of Item 303, see Section IV.B.3 to IV.B.7.
---------------------------------------------------------------------------

     Item 503(c), which requires disclosure of the most 
significant factors that make an investment in a registrant's 
securities speculative or risky; \465\ and
---------------------------------------------------------------------------

    \465\ Item 503(c) of Regulation S-K [17 CFR 229.503(c)].
---------------------------------------------------------------------------

     Item 305, which requires quantitative and qualitative 
disclosure about market risk.\466\
---------------------------------------------------------------------------

    \466\ Item 305 of Regulation S-K [17 CFR 229.305].
---------------------------------------------------------------------------

Also in this section, we explore different approaches to risk-related 
disclosure. Specifically, we consider whether requiring additional 
disclosure of management's approach to risk and risk management and 
consolidating risk-related disclosure would, on balance, be beneficial 
to investors and registrants. We also seek to better understand how our 
disclosure requirements could be updated to enhance investors' ability 
to evaluate a registrant's risk exposures. We are especially interested 
in feedback on how we can improve the content and readability of the 
risk factors included in a filing as well as the potential advantages 
and disadvantages of different approaches to risk-related disclosure.
1. Risk Factors (Item 503(c))
    Item 503(c) requires disclosure of the most significant factors 
that make an investment in a registrant's securities speculative or 
risky and specifies that the discussion should be concise and organized 
logically.\467\ Although the requirement is principles-based, it 
includes the following specific examples as factors that may make an 
offering speculative or risky:
---------------------------------------------------------------------------

    \467\ Item 503(c) of Regulation S-K [17 CFR 229.503(c)].
---------------------------------------------------------------------------

     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, or
     the lack of a market for a registrant's common equity 
securities or securities convertible or exercisable for common equity 
securities.\468\

    \468\ Id.
---------------------------------------------------------------------------

Additionally, Item 503(c) directs registrants to explain how each risk 
affects the registrant and discourages disclosure of risks that could 
apply to any registrant.
a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. We received several comment 
letters with recommendations on risk factor disclosure.\469\ One 
commenter suggested a comprehensive default framework for risk factor 
disclosure that would classify risk factors based upon relative 
likelihood and relative impact.\470\ This proposed framework would 
require registrants to classify both relative likelihood and relative 
impact into one of three tiers based on the risk's probable occurrence 
and the relative seriousness of the consequences if a risk 
materializes.
---------------------------------------------------------------------------

    \469\ See, e.g., letter from Tom C.W. Lin and attached law 
review article, (July 30, 2014) (``Lin''); CFA Institute; Shearman; 
A. Radin; CCMC; letters from Reps. Langevin and Himes (June 17, 
2015) (``Reps. Langevin and Himes''); Reps. Grijalva, Waters and 
Lowenthal (July 24, 2015) (``Reps. Grijalva, Waters and 
Lowenthal''); Sens. Cardin, et al. (Aug. 18, 2015) (``Sens. Cardin, 
et al.'').
    \470\ See Lin.
---------------------------------------------------------------------------

    One commenter stated that risk factors should be more entity-
specific and connected to financial results.\471\ Another commenter 
noted that registrants disclose risk factors that ``go well beyond 
those that make an investment `speculative''' and stated that any new 
risk factor disclosure requirements should be principles-based. This 
commenter suggested revising Item 503(c) to include examples of generic 
disclosure that need not be included as risk factors.\472\ One 
commenter generally recommended reducing lengthy, unnecessary risk 
factor disclosure.\473\ Another commenter urged that any such 
requirement be grounded in the principle of materiality, suggesting 
that we consider whether a

[[Page 23955]]

reformulated risk discussion should highlight the risks that management 
views as most significant.\474\
---------------------------------------------------------------------------

    \471\ See CFA Institute (stating that the ability to price risk 
is important to disclosure effectiveness).
    \472\ See Shearman. The commenter suggested the following 
factors could be included in a revised Item 503(c) as examples of 
generic risks that do not need to be disclosed as risk factors: 
macro-economic risks that effect all businesses in a particular 
industry; general stock market risks, such as volatility in a 
company's stock price; summaries of regulation; and risk disclosure 
that repeats disclosure provided in response to other specific 
requirements or financial disclosures, such as risks related to key 
management, legal proceedings and the payment of dividends.
    \473\ See A. Radin (noting the ``excessive volume'' of 
disclosures required by Regulations S-K and S-X).
    \474\ See CCMC.
---------------------------------------------------------------------------

    Several comment letters stated there should be additional risk-
related disclosure on specific topics.\475\ One set of commenters 
encouraged us to require additional disclosure about cybersecurity and 
related risks.\476\ Another group of commenters focused on additional 
disclosure of risks associated with oil and gas exploration, including 
drilling in the Arctic Ocean.\477\
---------------------------------------------------------------------------

    \475\ See, e.g., Reps. Langevin and Himes; Reps. Grijalva, 
Waters and Lowenthal; Sens. Cardin, et al.
    \476\ See, e.g., Reps. Langevin and Himes.
    \477\ See, e.g., Reps. Grijalva, Waters and Lowenthal; Sens. 
Cardin, et al.
---------------------------------------------------------------------------

    We received two comment letters on the impact of the Private 
Securities Litigation Reform Act (``PSLRA'') on risk-related 
disclosure. One commenter acknowledged that liability concerns may 
contribute to the length of Exchange Act documents but expressed 
concern about any effort to require issuers to reduce the length or 
number of risk factors included in a filing.\478\ Another commenter 
attributed the growing length of risk factor disclosure to liability 
concerns and noted that any efforts to reduce risk factor disclosure, 
without concomitant changes to the relevant rules or the protection of 
a safe harbor, are unlikely to be effective because there is little 
incentive for registrants to scale-back risk factor disclosure.\479\
---------------------------------------------------------------------------

    \478\ See SCSGP (referencing the Commission's proposal to limit 
the number of risk factors included in a filing in connection with 
the Commission's Plain English initiative and comments received in 
connection with that initiative, one of which states ``no issuer 
should ever be put in the position of choosing significant material 
risks in order to satisfy a numerical limitation.'').
    \479\ See Shearman (stating that the PSLRA's safe harbor, which 
requires issuers that disclose forward-looking information to also 
disclose cautionary information, contributes to lengthy risk factors 
disclosures).
---------------------------------------------------------------------------

b. Discussion
    The five factors specified in Item 503(c) as factors that may make 
an offering speculative or risky have not changed since the Commission 
published its initial guidance on risk factor disclosure in 1964. These 
factors were derived from previous stop order proceedings under Section 
8(d) of the Securities Act where the Commission suspended the 
effectiveness of previously filed registration statements due, in part, 
to inadequate disclosure about speculative aspects of the registrant's 
business.\480\
---------------------------------------------------------------------------

    \480\ See Guides for Preparation and Filing of Registration 
Statements, Release No. 33-4936 (Dec. 9, 1968) [33 FR 18617 (Dec. 
17, 1968)] (``1968 Guides'') (citing In the Matter of Doman 
Helicopters, Inc., 41 SE.C. 431 (Mar. 27, 1963); In the Matter of 
Universal Camera Corporation, 19 SE.C. 648 (June 28, 1945)).
---------------------------------------------------------------------------

    Since the Commission first published guidance on risk factor 
disclosure in 1964,\481\ it has been reiterated that this disclosure 
should be:
---------------------------------------------------------------------------

    \481\ See Guides for Preparation and Filing of Registration 
Statements, Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 
1964)] (``1964 Guides'').
---------------------------------------------------------------------------

     Focused on the ``most significant'' or ``principal'' 
factors that make a registrant's securities speculative or risky, \482\
---------------------------------------------------------------------------

    \482\ ``Principal'' was the term used in the 1982 Integrated 
Disclosure Adopting Release and ``most significant'' was the term 
used in the Plain English Disclosure Adopting Release.
---------------------------------------------------------------------------

     placed in the forefront of the filing,\483\ and
---------------------------------------------------------------------------

    \483\ See 1964 Guides; 1968 Guides; and 1982 Integrated 
Disclosure Adopting Release.
---------------------------------------------------------------------------

     organized and concise.\484\

    \484\ See 1964 Guides; 1968 Guides; 1982 Integrated Disclosure 
Adopting Release; and Securities Offering Reform Release.
---------------------------------------------------------------------------

Commission and Division guidance also has emphasized that registrants 
should avoid ``boiler plate'' risk factors, and that a discussion of 
risk in purely generic terms does not indicate how a risk may affect an 
investment in a particular registrant.\485\ When adding risk factor 
requirements to annual and quarterly reports and Exchange Act 
registration statements on Form 10, the Commission discouraged the 
unnecessary restatement of risk factors in quarterly reports, 
emphasizing that quarterly reports need only disclose material changes 
from risk factors previously disclosed in other Exchange Act 
reports.\486\
---------------------------------------------------------------------------

    \485\ See Plain English Disclosure Adopting Release. See also 
Updated Staff Legal Bulletin No. 7: Plain English Disclosure (June 
7, 1999), available at https://www.sec.gov/interps/legal/cfslb7a.htm 
(``Updated Staff Legal Bulletin No. 7'').
    \486\ See Securities Offering Reform Release. In adopting new 
item requirements in Forms 10-K, 10-KSB, and 10 to require risk 
factor disclosure, the Commission noted that, though not previously 
required, many registrants had included for several years risk 
factor disclosure in their Exchange Act reports, perhaps to take 
advantage of the safe harbor in Securities Act Section 27A and the 
judicially-created ``bespeaks caution'' defense.
---------------------------------------------------------------------------

    The length and number of risk factors disclosed by registrants 
varies. Although Item 503(c) directs registrants to provide a concise 
risk factors discussion, one study found that registrants include an 
average of 22 different risk factors in disclosure spanning an average 
of 8 pages.\487\ Another study found that registrants increased the 
length of risk factor disclosures from 2006 to 2013 by more than 
eighty-five percent in terms of word count relative to the total word 
count of Form 10-K filings, and that this increase in quantity may not 
be associated with better disclosure.\488\ A third study found that the 
average number of risk factors disclosed in certain sectors of the 
energy industry ranged between twelve and fifty-one.\489\ For quarterly 
reports, it is not unusual for registrants to repeat the entire risk 
factor discussion from their previously filed annual reports,\490\ even 
though registrants are required to disclose only material changes from 
previously disclosed risks.\491\
---------------------------------------------------------------------------

    \487\ See Investor Responsibility Research Center Institute, The 
Corporate Risk Factor Disclosure Landscape, Jan. 2016, available at 
https://irrcinstitute.org/wp-content/uploads/2016/01/FINAL-EY-Risk-Disclosure-Study.pdf.
    \488\ See Anne Beatty et al., Sometimes Less is More: Evidence 
from Financial Constraints Risk Factor Disclosures, Mar. 2015, 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2186589 (``Beatty et al.''). To examine the 
``informativeness'' of risk factor disclosures, the authors of this 
study analyzed risk factor disclosures about financial constraints 
and argue that as litigation risk increased during and after the 
financial crisis, registrants were more likely to disclose 
immaterial information, resulting in a deterioration of disclosure 
quality.
    \489\ See PricewaterhouseCoopers LLP, Stay Informed, 2012 
Financial Reporting Survey: Energy industry current trends in SEC 
reporting, Feb. 2013, available at https://www.pwc.com/en_GX/gx/oil-gas-energy/publications/pdfs/pwc-sec-financial-reporting-energy.pdf. 
This report reviewed financial reporting trends of 87 registrants 
with market capitalizations of at least $1 billion that apply U.S. 
GAAP in the following subsectors of the energy industry: downstream, 
drillers, independent oil and gas, major integrated oil and gas, 
midstream and oil field equipment and services. Based on this study, 
the average number of risk factors in the major integrated oil and 
gas sector was 12 while the average number of risk factors in the 
midstream sector was 51. In one sector, the maximum number of risk 
factors was 95.
    \490\ See PricewaterhouseCoopers LLP, Stay Informed: 2014 
technology financial reporting trends, Aug. 2014, available at 
https://www.pwc.com/en_US/us/technology/publications/assets/pwc-2014-technology-financial-reporting-trends.pdf. This report reviewed the 
annual and periodic filings of 135 registrants in the software and 
Internet, computers and networking, and semiconductors sectors. 
Based on this study, over half of the registrants surveyed repeated 
all of their risk factors in their quarterly filings.
    \491\ See Item 1A of Part II of Form 10-Q.
---------------------------------------------------------------------------

    Although Item 503(c) instructs registrants not to present risks 
that could apply to any registrant, risk factor disclosure typically 
includes generic risk factors. Registrants often use risk factors that 
are similar to those used by others in their industry or circumstances 
as the starting point for risk disclosure, and the disclosure is not 
always tailored to each registrant's particular risk profile. Examples 
of generic disclosures include risk factors about a registrant's 
failure to compete successfully, the effect of general economic 
conditions on a registrant's business, changes in regulation, and 
dependence upon a registrant's

[[Page 23956]]

management team. Despite the inclusion of generic risks, however, 
academic studies find that risk factor disclosure is informative and 
that the public availability of this information decreases information 
asymmetry among investors.\492\
---------------------------------------------------------------------------

    \492\ See, e.g., John Campbell et al., The Information Content 
of Mandatory Risk Factor Disclosures in Corporate Filings, 19 Rev. 
Acct. Stud. 396, 396-455 (Sept. 2010); Beatty et al.
---------------------------------------------------------------------------

c. Request for Comment
    145. How could we improve risk factor disclosure? For example, 
should we revise our rules to require that each risk factor be 
accompanied by a specific discussion of how the registrant is 
addressing the risk?
    146. Should we require registrants to discuss the probability of 
occurrence and the effect on performance for each risk factor? If so, 
how could we modify our disclosure requirements to best provide this 
information to investors? For example, should we require registrants to 
describe their assessment of risks?
    147. How could we modify our rules to require or encourage 
registrants to describe risks with greater specificity and context? For 
example, should we require registrants to disclose the specific facts 
and circumstances that make a given risk material to the registrant? 
How should we balance investors' need for detailed disclosure with the 
requirement to provide risk factor disclosure that is ``clear and 
concise''? Should we revise our rules to require registrants to present 
their risk factors in order of management's perception of the magnitude 
of the risk or by order of importance to management? Are there other 
ways we could improve the organization of registrants' risk factors 
disclosure? How would this help investors navigate the disclosure?
    148. What, if anything, detracts from an investor's ability to gain 
important information from a registrant's risk factor disclosure? Do 
lengthy risk factor disclosures hinder an investor's ability to 
understand the most significant risks?
    149. How could we revise our rules to discourage registrants from 
providing risk factor disclosure that is not specific to the registrant 
but instead describes risks that are common to an industry or to 
registrants in general? Alternatively, are generic risk factors 
important to investors?
    150. Should we specify generic risks that registrants are not 
required to disclose, and if so, how should we identify those risks? 
Are there other ways that we could help registrants focus their 
disclosure on material risks?
    151. Should we retain or eliminate the examples provided in Item 
503(c)? Should we revise our requirements to include additional or 
different examples? Would deleting these examples encourage registrants 
to focus on their own risk identification process?
    152. Should we require registrants to identify and disclose in 
order their ten most significant risk factors without limiting the 
total number of risk factors disclosed? \493\ If so, should other risk 
factors be included in a separate section of the filing or in an 
exhibit to distinguish them from the most significant risks? 
Alternatively, should we require registrants to provide a risk factors 
summary in addition to the complete disclosure? Would a summary help 
investors better understand a registrant's risks by highlighting 
certain information? Are there challenges associated with requiring a 
summary of the most significant risks?
---------------------------------------------------------------------------

    \493\ The Commission has previously considered proposals to 
either limit the number of risk factors included in a filing or 
require registrants to list risk factors in the order of priority to 
the registrant. The Commission did not adopt either of these 
requirements in response to comments received from investors. See 
Plain English Disclosure Adopting Release at 6370 (``In response to 
comments, the new rules will not require issuers to limit the length 
of the summary, limit the number of risk factors, or prioritize risk 
factors.'').
---------------------------------------------------------------------------

    153. Are there ways, in addition to those we have used in Item 503, 
our Plain English Rules and guidance on MD&A, to ensure that 
registrants include meaningful, rather than boilerplate, risk factor 
disclosure?
    154. Risk profiles of registrants are constantly changing and 
evolving. For example, registrants today face risks, such as those 
associated with cybersecurity, climate change, and arctic 
drilling,\494\ that may not have existed when the 1964 Guides and 1968 
Guides were published. Is Item 503(c) effective for capturing emerging 
risks? If not, how should we revise Item 503(c) to make it more 
effective in this regard?
---------------------------------------------------------------------------

    \494\ For a discussion of some emerging risks that registrants 
may face, see Section 0.
---------------------------------------------------------------------------

    155. What types of investors or audiences are most likely to value 
the Item 503(c) disclosures?
    156. What is the cost of providing the disclosure required by Item 
503(c), including the administrative and compliance costs of preparing 
and disseminating this disclosure? How would these costs change if we 
made any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 503(c).
2. Quantitative and Qualitative Disclosures About Market Risk (Item 
305)
    Item 305 requires quantitative and qualitative disclosure of market 
risk sensitive instruments that affect a registrant's financial 
condition.\495\ Item 305(a) requires registrants to provide 
quantitative disclosure about market risk sensitive instruments using 
one or more of three disclosure alternatives:
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    \495\ Item 305 of Regulation S-K [17 CFR 229.305]. For the 
purposes of Item 305(a) and (b), market risk sensitive instruments 
include derivative financial instruments, other financial 
instruments, and derivative commodity instruments. Each of these 
terms is defined in General Instruction 3 to Items 305(a) and (b). 
See Disclosure of Market Risk Sensitive Instruments Release.
---------------------------------------------------------------------------

    (1) Tabular presentation of fair value information and contract 
terms relevant to determining future cash flows, categorized by 
expected maturity dates;
    (2) Sensitivity analysis expressing the potential loss in future 
earnings, fair values, or cash flows from selected hypothetical changes 
in market rates and prices; or
    (3) Value at risk (``VaR'') disclosures expressing the potential 
loss in future earnings, fair values, or cash flows from market 
movements over a selected period of time and with a selected likelihood 
of occurrence.\496\
---------------------------------------------------------------------------

    \496\ Item 305(a) of Regulation S-K [17 CFR 229.305(a)].
---------------------------------------------------------------------------

    Registrants are required to categorize market risk sensitive 
instruments into instruments entered into for trading purposes and 
instruments entered into for purposes other than trading.\497\ To the 
extent material, within both the trading and other than trading 
portfolios, registrants must provide separate quantitative information 
for each market risk exposure category (e.g., interest rate risk, 
foreign currency exchange rate risk, commodity price risk, and other 
relevant market risks, such as equity price risk).\498\
---------------------------------------------------------------------------

    \497\ Id.
    \498\ Id. In their materiality assessment, registrants are 
required to evaluate both the materiality of the fair values of 
derivative financial instruments, other financial instruments, and 
derivative commodity instruments as of the end of the latest fiscal 
year and the materiality of potential, near-term losses in future 
earnings, fair values, and/or cash flows from reasonably possible 
near-term changes in market rates or prices. See General Instruction 
5 to Items 305(a) and (b) of Regulation S-K [17 CFR 229.305(a) and 
(b)].
---------------------------------------------------------------------------

    Item 305(b) requires qualitative information about market risk. 
Registrants must describe, to the extent material, their primary market 
risk exposures, how those exposures are managed, and any changes to 
either the primary market risk exposures or the way that risk exposures 
are managed.\499\

[[Page 23957]]

One of Item 305's primary objectives is to provide investors with 
forward looking information about a registrant's potential market risk 
exposure.\500\ To specifically cover the forward-looking aspects of 
disclosure provided in response to Item 305, the Commission adopted a 
safe harbor as part of the rule.\501\
---------------------------------------------------------------------------

    \499\ Item 305(b) of Regulation S-K [17 CFR 229.305(b)].
    \500\ See Disclosure of Market Risk Sensitive Instruments 
Release.
    \501\ Item 305(d) of Regulation S-K [17 CFR 229.305(d)].
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. A few commenters suggested that EGCs should be exempt 
from Item 305 disclosure.\502\ Another commenter expressed concern that 
the FASB's 2012 Exposure Draft on liquidity risk and interest rate risk 
disclosures could have created redundancies with some of the 
disclosures currently required in Items 305 and 303.\503\
---------------------------------------------------------------------------

    \502\ See, e.g., Silicon Valley and M. Liles.
    \503\ See Ernst & Young 1 (referring to Proposed Accounting 
Standards Update on FASB's Web site, Financial Instruments (Topic 
825): Disclosures about Liquidity Risk and Interest Rate Risk). The 
2012 Exposure Draft is no longer on the FASB's active agenda. See 
FASB Technical Agenda (last visited Mar. 2, 2016), available at 
https://www.fasb.org/jsp/FASB/Page/TechnicalAgendaPage&cid=1175805470156#tab_1175805486413.
    The 2012 Exposure Draft aimed to provide more useful information 
on exposures to liquidity risk and to interest rate risk by 
requiring, among other things, tabular disclosure of liquidity risk 
related to financial assets and financial liabilities or cash flow 
obligations, disaggregated by expected maturities; carrying amounts 
of classes of financial assets and financial liabilities, segregated 
according to time intervals based on contractual repricing; an 
interest rate sensitivity table showing the effects on net income 
and shareholder equity of specific hypothetical shifts of interest 
rates; and quantitative or narrative disclosure as necessary to 
understand exposures to liquidity risk and interest rate risk. For a 
discussion of the 2012 Exposure Draft, see Section IV.C.2.b.iii.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Several commenters noted that, 
while financial reporting in accordance with evolving accounting 
standards has greatly expanded since the adoption of Item 305, 
including the adoption of ASC Topic 815, Item 305 and other disclosure 
requirements in Regulation S-K have not been revisited to identify and 
eliminate redundancies.\504\ One of these commenters suggested 
eliminating Item 305 in light of current U.S. GAAP requirements, or, 
alternatively, re-focusing Item 305 to permit principles-based 
disclosure of market risk.\505\ Another commenter stated that improving 
market risk disclosures should be a high priority and that there should 
be a better linkage among the financial statements and other risk-
related disclosure.\506\ One commenter asserted that there is confusion 
in the marketplace about what specific disclosure is required under 
Item 305.\507\ Another commenter stated that updating Item 305 should 
be a ``central aspect'' of disclosure effectiveness efforts and 
included specific suggestions for revisions, including improving 
VaR.\508\ Though not commenting on Item 305 specifically, one commenter 
stated its belief that standardized disclosure of common exposures to 
derivatives is warranted.\509\
---------------------------------------------------------------------------

    \504\ See, e.g., CCMC (noting that ASC Topic 815 provides 
substantial guidance about hedge accounting and also stating there 
is some redundancy between Item 305 and Item 303, evidenced by the 
fact that some public companies do not provide stand-alone 
disclosure in response to Item 305); SCSGP (noting overlap between 
certain market risk disclosures required by S-K Item 305, ASC 820 
Fair Value Measurements, and ASC 815 Derivatives and Hedging); ABA 
2.
    \505\ See ABA 2 (citing ASC 820 Fair Value Measurements and ASC 
815 Derivatives and Hedging and suggesting that any such principles-
based disclosure of market risk could be included in MD&A). The 
degree of overlap between Item 305 and U.S. GAAP depends on which of 
Item 305's presentations is chosen and on whether information that 
is encouraged to be provided by ASC 820, including qualitative 
disclosure on risk management, is actually provided. Using a tabular 
presentation under Item 305 generally results in greater overlap 
with ASC 820 and ASC 815. Item 305 also requires that disclosure be 
made outside the financial statement footnotes.
    \506\ See CFA Institute. This commenter did not provide a 
suggestion as to how to better link financial statement disclosures 
with risk-related disclosure provided elsewhere in a filing.
    \507\ See CCMC. This commenter stated Item 305 is ``one of the 
most complicated disclosure requirements to parse in all of 
Regulation S-K.''
    \508\ See Hu. In research cited in the comment letter, this 
commenter perceived three problems with Item 305's VaR presentation: 
(i) Too much ``latitude as to (a) the models, assumptions, and 
parameters used, as well as (b) the confidence level and time 
horizon [registrants can] choose to report at;'' (ii) no evidence as 
to the quality of the VaR model is required; and (iii) VaR ``is not 
intended to gauge possible losses in times of high economic 
stress.'' See Henry T. C. Hu, Disclosure Universes and Modes of 
Information: Banks, Innovation, and Divergent Regulatory Quests, 31 
Yale J. on Reg. 565, 598 (2014) (``Hu 2014'').
    \509\ See AFL-CIO. As an example of common exposures, this 
commenter cited credit triggers under swaps contracts where ``banks 
may require companies to fully collateralize credit exposures under 
certain conditions.''
---------------------------------------------------------------------------

b. Discussion
i. Disclosure Objective
    The adequacy of market risk disclosure emerged as an important 
financial reporting issue in the 1990s following a substantial increase 
in the use of derivatives and other instruments subject to market risk 
and the significant, sometimes unexpected, losses registrants 
experienced from their use of these instruments.\510\ The Commission 
adopted Item 305 in 1997 to improve disclosures about market risk and 
help investors better understand and evaluate a registrant's market 
risk exposures.\511\ The required disclosures were also intended, where 
applicable, to provide a mechanism for registrants to disclose that 
their use of derivatives represents risk management rather than 
speculation.\512\
---------------------------------------------------------------------------

    \510\ See Disclosure of Market Risk Sensitive Instruments 
Release.
    \511\ See id. In conjunction with adopting Item 305, the 
Commission amended Rule 4-08 of Regulation S-X and Item 310 of 
Regulation S-B, which is no longer in effect, to require enhanced 
descriptions of accounting policies for derivatives in the footnotes 
to the financial statements. These revisions were designed to 
address footnote disclosures of accounting policies that were often 
too general to convey adequately the diversity in accounting that 
exists for derivatives. In contrast to Item 305, which applies to 
all financial instruments, the new disclosure requirements under 
Rule 4-08 and Item 310 applied only to derivatives; disclosure 
requirements for other financial instruments were addressed by 
existing U.S. GAAP and Commission guidance. Id. (citing Accounting 
Principles Board Opinion No. 22 (April 1972)). SRCs are not required 
to provide Item 305 information. Item 305(e) of Regulation S-K [17 
CFR 229.305(e)].
    \512\ See Disclosure of Market Risk Sensitive Instruments 
Release.
---------------------------------------------------------------------------

    To achieve these goals, the Commission used the following guiding 
principles in adopting Item 305:
     Disclosures should make transparent the impact of 
derivatives on a registrant's statements of financial position, cash 
flows, and results of operations;
     Disclosures should provide information about a 
registrant's exposures to market risk;
     Disclosures should explain how market risk sensitive 
instruments are used in the context of the registrant's business;
     Disclosures about market risk exposures should not focus 
on derivatives in isolation, but rather should reflect the risk of loss 
inherent in all market risk sensitive instruments;
     Market risk disclosure requirements should be flexible 
enough to accommodate different types of registrants, different degrees 
of market risk exposure, and alternative ways of measuring market risk;
     Disclosures about market risk should address, where 
appropriate, special risks relating to leverage, option, or prepayment 
features; and
     New disclosure requirements should build on existing 
requirements, where possible, to minimize compliance costs.\513\
---------------------------------------------------------------------------

    \513\ See id.
---------------------------------------------------------------------------

    Item 305 was designed to address concerns that market risks 
associated with derivatives and other market-sensitive instruments were 
not adequately disclosed.\514\ In the adopting

[[Page 23958]]

release for Item 305, the Commission noted that disclosure about 
reported items in the footnotes to the financial statements, MD&A, 
schedules and selected financial data may not have adequately reflected 
the effect of derivatives on such reported items.\515\ In addition, 
disclosures about different types of market risk sensitive instruments 
were often reported separately, making it difficult to assess a 
registrant's aggregate market risk exposures.\516\ Accordingly, Item 
305 was intended to help investors understand a registrant's risk 
management activities and to help place those activities in the context 
of the registrant's business by requiring enhanced disclosure about 
specific market risk sensitive instruments.\517\
---------------------------------------------------------------------------

    \514\ See id. The disclosure issues were noted as part of the 
staff's review of more than 500 annual reports in 1994 and 1995 to 
evaluate the adequacy of market risk disclosure and assess the 
effect of new FAS 119 on market risk disclosure. See id.
    \515\ See id.
    \516\ See id.
    \517\ See id.
---------------------------------------------------------------------------

    Division staff has observed that the instructions to Item 305 may 
inadvertently discourage some disclosure. For example, a sensitivity 
analysis requires disclosure of the potential loss to the future 
earnings, fair values, or cash flows of market risk sensitive 
instruments from a hypothetical change in rates or prices.\518\ The 
instructions to Item 305(a) state that registrants should select 
hypothetical changes in market rates or prices that are expected to 
reflect reasonably possible near-term changes in those rates and 
prices; however, absent economic justification for the selection of a 
different amount, ``registrants should use changes that are not less 
than ten percent of end of period market rates or prices.'' \519\ Many 
registrants apply the ten percent threshold even when market 
conditions, such as persistently low interest rates or volatile 
exchange rates, may suggest that a different threshold, or even 
multiple thresholds, would be more appropriate.\520\
---------------------------------------------------------------------------

    \518\ Item 305(a)(1)(ii) of Regulation S-K [17 CFR 
229.305(a)(1)(ii)].
    \519\ Instruction 3A to paragraph 305(a).
    \520\ For example, the prime rate in the U.S. has been 3.5% or 
3.25% for a number of months. See https://online.wsj.com/mdc/public/page/2_3020-moneyrate.html?mod=mdc_bnd_pglnk. Many registrants 
present their interest rate risk under the sensitivity analysis 
showing only a shift of 10% of this amount, or 35 or 33 (rounded) 
basis points. Financial services and financial institution 
registrants, on the other hand, often provide analyses of various 
shifts in interest rates and evaluate shifts of 50, 100, and 200 
basis points, both up and down. This more comprehensive presentation 
may provide investors with a better understanding of how various 
shifts in market risk, both more moderate and more pronounced, might 
impact the registrant.
---------------------------------------------------------------------------

    Considering commenters' differing views on the efficacy of Item 305 
and the complexity of Item 305's required disclosures, we seek input on 
whether, and how, changes to Item 305 would be beneficial to both 
investors and registrants.
(a) Request for Comment
    157. Is Item 305 effective in eliciting disclosure about market 
risks and risk management practices that investors consider important? 
If not, how could Item 305 be improved?
    158. Does Item 305 result in information that allows investors to 
effectively assess (1) a registrant's aggregate market risk exposure, 
and (2) the impact of market risk sensitive instruments on a 
registrant's results of operations and financial condition? If not, how 
could we revise Item 305 to achieve these goals?
    159. Do the disclosure alternatives in Item 305(a) elicit adequate 
quantitative disclosure about market risk? Do the rules or the 
instructions discourage registrants from fully evaluating and 
disclosing their market risk exposures, such as in a sensitivity 
analysis? Should the rules be more prescriptive? If so, in what ways 
should we revise the rules and instructions to Item 305(a)?
    160. Should additional or different principles guide the market 
risk disclosure requirements? Should we expand our definition of 
``market risk sensitive instruments'' to require registrants to provide 
additional disclosure about other risks, including credit risk, 
liquidity and funding risk and operational risk?
    161. Should we limit the quantitative disclosure requirement to 
certain registrants such as financial institutions or registrants 
engaged in financial services? Why or why not?
    162. What types of investors or audiences are most likely to value 
the information required by Item 305?
    163. What is the cost of providing the disclosure required by Item 
305, including the administrative and compliance costs of preparing and 
disseminating this disclosure? How would these costs change if we made 
any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 305.
ii. Disclosure Alternatives and Coordination With Financial Statement 
Disclosures
    Item 305(a) specifies three disclosure alternatives for registrants 
to present quantitative information about market risk: Tabular 
disclosure, sensitivity analysis, and VaR.\521\ In adopting Item 305, 
the Commission recognized the evolving nature of market risk sensitive 
instruments, market risk measurement systems, and market risk 
management strategies.\522\ The Commission stated that it expected to 
``continue considering how best to meet the information needs of 
investors.'' \523\ Accordingly, we are seeking input on whether and how 
we should revise Item 305 to reflect changes in market risk exposures 
and methods for measuring market risk.
---------------------------------------------------------------------------

    \521\ Item 305(a)(1) of Regulation S-K [17 CFR 229.305(a)(1)].
    \522\ See Disclosure of Market Risk Sensitive Instruments 
Release.
    \523\ See id. at 6046.
---------------------------------------------------------------------------

    In response to the proposing release for Item 305, some commenters 
suggested greater flexibility and recommended a ``management approach'' 
to disclosure. As suggested by the commenters, this disclosure would 
focus on the information and methods that management actually uses 
internally to evaluate, monitor, and manage market risk.\524\ The 
Commission did not adopt this approach, believing that a presentation 
of market risk using a management approach outside of the framework 
articulated in Item 305 could make it difficult for investors to assess 
market risk across registrants.\525\ We are interested in whether a 
``management approach'' to disclosure is preferable to the alternatives 
specified in the current rule.
---------------------------------------------------------------------------

    \524\ See id. at 6055. Commenters believed that ``the approaches 
in the proposing release (i) do not appear to allow gap and duration 
analyses, which are currently used by some to measure market risk, 
and (ii) may become outdated as new measurement approaches are 
developed in the market place.'' Id. at 6055.
    \525\ See id. The Commission noted that, in adopting Item 305, 
it sought to strike a balance between those seeking a ``management 
approach'' and those supporting a more consistent reporting 
framework for the sake of comparability. See id.
---------------------------------------------------------------------------

    We are also interested in whether we should modify Item 305 given 
accounting developments since the item's adoption. When the Commission 
adopted Item 305 in 1997, minimal authoritative literature on the 
accounting for options and complex derivatives existed.\526\ Since that 
time, accounting requirements have evolved to provide for greater 
disclosure of market risk sensitive instruments.\527\ As a result, 
there may be redundancies

[[Page 23959]]

between the disclosure provided in response to Item 305 and U.S. GAAP. 
Commission staff has observed that, the degree of repetition in the 
disclosure depends on which Item 305 disclosure alternative a 
registrant utilizes and whether a registrant provides information that 
is encouraged by U.S. GAAP in addition to the disclosure that is 
required.\528\
---------------------------------------------------------------------------

    \526\ See Disclosure of Market Risk Sensitive Instruments 
Release.
    \527\ FASB Accounting Standards Update No. 2011-04, May 2011, 
Fair Value Measurement (Topic 820). ASC 820 requires the disclosure 
of fair value of all financial instruments, including derivatives 
and non-derivative financial instruments, but does not require any 
expected maturity information.
    \528\ For example, ASC 815 encourages but does not require that 
disclosure about a registrant's objectives and strategies for using 
derivatives be described in the context of the entity's overall risk 
exposures. The standard indicates that if these additional 
qualitative disclosures are made, they should include a discussion 
of those risk exposures even though the registrant does not manage 
some of those risk exposures using derivatives.
---------------------------------------------------------------------------

    Item 305 disclosure also tends to vary among registrants. Many 
registrants provide a sensitivity analysis to present market risk 
information, while others rely on tabular presentation or VaR. For 
large financial institutions, it is not unusual to use some combination 
of the three to capture different market risk sensitive instruments.
(a) Request for Comment
    164. How have standard risk management practices and methods of 
reporting market risk evolved since the adoption of Item 305 in 1997? 
Should we revise Item 305 to reflect those changes and if so, how? 
Should we provide for new disclosure alternatives in addition to, or in 
lieu of, existing alternatives?
    165. What revisions should we consider to better link disclosure 
that identifies, quantifies, and analyzes a registrant's material 
market risks to its: (a) Market risk sensitive instruments, (b) 
financial statements, (c) capital adequacy, and (d) any other metrics 
important to an understanding of market risk exposures?
    166. Should we eliminate the prescribed disclosure alternatives and 
allow registrants to discuss market risk according to the methods used 
by management to manage the risk? Would allowing a ``management 
approach'' provide investors with more insight about the way management 
actually assesses market risks, or would this approach unduly hinder 
investors' ability to compare market risk disclosures across 
registrants?
    167. Is the disclosure required by Item 305 repetitive of the 
disclosure required by U.S. GAAP and Rule 4-08 of Regulation S-X? 
Conversely, does Item 305 result in disclosure that is important to 
investors and is not found elsewhere in a registrant's filing? Even 
considering any repetition, do investors benefit from disclosure about 
market risk exposure outside of the audited financial statements?
iii. Comparability of Disclosure
    In adopting Item 305, the Commission acknowledged the tension 
between approaches to market risk disclosure that favor comparability 
and approaches that favor flexibility.\529\ The approach taken in the 
final rules sought to strike a balance between different commenters' 
perspectives.\530\
---------------------------------------------------------------------------

    \529\ See Disclosure of Market Risk Sensitive Instruments 
Release at 6048 (``The Commission has provided flexibility in the 
quantitative and qualitative disclosure requirements . . . even 
though such flexibility is likely to reduce the comparability of 
disclosures.'').
    \530\ See id.
---------------------------------------------------------------------------

    The Commission designed Item 305 to be flexible by prescribing 
three disclosure alternatives without stipulating standardized methods 
and procedures specifying how to comply with each alternative.\531\ 
Registrants may choose which methods, model characteristics, 
assumptions, and parameters they use in complying with the item, and 
registrants may use more than one disclosure alternative across each 
market risk exposure category.\532\
---------------------------------------------------------------------------

    \531\ See id. For example, the terms used to describe two of the 
three disclosure alternatives--``sensitivity analysis'' and ``value 
at risk''--describe a general class of models. They are not meant to 
refer to any one model for quantifying market risk. In addition, 
Item 305 permits registrants to change disclosure alternatives or 
key model characteristics, assumptions, and parameters used in 
providing quantitative information about market risk, with 
disclosure if the effects of such a change are material. The 
Commission also noted that two methods of measuring market risk then 
in use, gap analysis and duration analysis, would, with minor 
revisions, satisfy the tabular and sensitivity analysis disclosure 
requirements respectively. Id.
    \532\ See id.; Item 305(a)(1)(i)(B) of Regulation S-K [17 CFR 
229.305(a)(1)(i)(B)]; Item 305(a)(1)(ii)(B) of Regulation S-K [17 
CFR 229.305(a)(1)(ii)(B)]; Item 305(a)(1)(iii)(B) of Regulation S-K 
[17 CFR 229.305(a)(1)(iii)(B)].
---------------------------------------------------------------------------

    To address comparability, the Commission included a requirement 
that registrants describe the characteristics of the model and the 
assumptions used to prepare the quantitative market risk disclosures. 
By requiring a description of the model and its assumptions, the 
Commission intended to assist investors in evaluating the potential 
effect of variations in the model's characteristics and 
assumptions.\533\
---------------------------------------------------------------------------

    \533\ See Disclosure of Market Risk Sensitive Instruments 
Release.
---------------------------------------------------------------------------

    In 2012, the FASB examined the question of comparability and 
considered standardizing liquidity and interest rate risk disclosure as 
part of a project that is currently in Exposure Draft form.\534\ The 
Exposure Draft would have required all reporting entities to provide 
standardized quantitative disclosure about liquidity risk, but only 
financial institutions would have been required to provide additional, 
standardized quantitative disclosure about interest rate risk.
---------------------------------------------------------------------------

    \534\ See Proposed Accounting Standards Update 2012-200 
Disclosure about Liquidity Risk and Interest Rate Risk--Financial 
Instruments (Topic 825), Financial Accounting Standards Board 
(Issued June 27, 2012), available at https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176160135003.
    This Exposure Draft was partly in response to demand by users 
for audited, standardized, and consistent disclosures by public 
companies. The Exposure draft noted that, as part of a May 2010 
proposed Accounting Standards Update (Accounting for Financial 
Instruments and Revisions to the Accounting for Derivative 
Instruments and Hedging Activities--Financial Instruments (Topic 
825) and Derivatives and Hedging (Topic 815)), the FASB performed 
extensive outreach and received feedback that the risks inherent in 
a class of financial instruments and the way in which an entity 
manages those risks through its business operations should be 
instrumental in developing the reporting model for financial 
instruments. The important risks identified by users of financial 
statements during the FASB's outreach efforts were credit risk, 
liquidity risk, and interest rate risk. See also supra note 503.
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    Although initiated, in part, as a response to comments received 
from financial statement users to an earlier FASB release on financial 
statements, the majority of respondents to the Exposure Draft, eighty-
four percent of whom were preparers, did not support the proposed 
disclosures.\535\ Most respondents stated that standardizing 
information about liquidity and interest rate risk is not appropriate 
and not achieved by the proposals.\536\ Some commenters questioned 
whether standardization is an appropriate objective and if it could 
ever be achieved.\537\
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    \535\ See Accounting for Financial Instruments Disclosures About 
Liquidity Risk and Interest Rate Risk Comment Letter Summary, 
Financial Accounting Standards Board, available at https://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176160500931.
    \536\ See id. These respondents also asserted that institutions 
are required by regulation to ensure that risks are monitored using 
processes that are commensurate with the complexity of their 
business. See id.
    \537\ See id.
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(a) Request for Comment
    168. Should we revise Item 305 to provide for more standardized 
disclosure that would enhance comparability among registrants? How 
should we balance standardization with different methods and 
assumptions that registrants may use to evaluate, monitor, and manage 
market risk? How would standardization affect investors and 
registrants?

[[Page 23960]]

3. Disclosure of Approach to Risk Management and Risk Management 
Process
    Item 503(c) focuses exclusively on disclosure of significant risks 
and does not address disclosure of a registrant's strategy for managing 
risk. Item 305(b), however, requires disclosure about a registrant's 
primary market risks and how those risks are managed. In the past, 
Commission staff has discouraged registrants from including mitigating 
language in their Item 503 risk factor disclosure because of concern 
that mitigating language could dilute investors' perception of the 
magnitude of the risk. As a result, registrants typically do not 
discuss their efforts to mitigate risk in connection with their risk 
factors disclosure, although some registrants describe their risk 
management practices elsewhere in their filings, such as in MD&A and as 
required by Item 305 for market risk.
    Disclosure about a registrant's approach to risk management could 
enhance investor understanding of the possible impact of a disclosed 
risk and the registrant's overall risk profile. Division staff has 
observed that most large financial institutions have implemented 
enterprise risk management programs and currently include detailed 
disclosure about those programs in their filings. Additional disclosure 
about changes to, or significant deviations from, the stated policies 
could provide investors with important information about the 
registrant's exposure to risk.\538\ Registrants that do not provide 
disclosure about a formal enterprise risk management program may 
instead provide disclosure about management's general approach to risk 
management as well as specific efforts to mitigate individual 
significant risks.
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    \538\ For an example of a registrant deviating from its stated 
risk management policies, see Report of Anton R. Valukas, Examiner, 
In Re Lehman Brothers Holdings Inc., et al., Vol. I at 167-168 
(discussing evidence that management disregarded its risk controls 
with respect to bridge equity and bridge debt).
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    We are mindful of the potential drawbacks of requiring registrants 
to provide risk management or risk mitigation disclosure. Disclosure of 
management's efforts to mitigate risk may suggest to investors that the 
registrant's risk exposure is not significant. In addition, risk 
management strategies could include confidential or proprietary 
information and disclosure could result in competitive harm to the 
registrant. For example, a registrant may develop and rely on a 
proprietary method for hedging financial risk, and disclosure of the 
method could allow others to exploit or trade against the method such 
that it is no longer effective or becomes too expensive.\539\
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    \539\ Commission concern for protecting proprietary strategies 
in connection with Item 305 disclosures is reflected in four 
provisions addressing proprietary concerns. See Disclosure of Market 
Risk Sensitive Instruments Release. The four provisions are: (i) The 
sensitivity analysis and VaR alternatives for quantitative 
information; (ii) the option to report average, high, and low 
sensitivity analysis and VaR instead of year end information; (iii) 
for interim reports, the need for disclosure of material changes 
since the end of the most recent fiscal year; and (iv) requiring a 
combined, not separate, sensitivity or VaR disclosures for 
voluntarily disclosed instruments, positions, or transactions.
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a. Request for Comment
    169. Should we require registrants to describe their risk 
management processes? If so, what level of detail would be appropriate? 
If a registrant has no formal risk management approach or process, 
should we require it to describe how it monitors and evaluates risk?
    170. Should we require registrants also to describe their 
assessment of any risk management process? If so, how often should such 
disclosure be required?
    171. Should we require registrants with complex risk management 
approaches or processes to provide only an enterprise-level 
description, or is a more granular description appropriate for these 
registrants?
    172. Should we require registrants to disclose when risk tolerance 
limits or other fundamental aspects of its risk management approach are 
waived or changed, including any assumptions or relevant changes in 
business strategy that underlies the new limits or policies?
    173. Should we require registrants to identify, if material, other 
``primary risk exposures'' not already addressed and to disclose 
actions taken to manage those risks?
    174. How could we facilitate a more integrated discussion of risk 
exposure and risk mitigation? Should we require registrants to disclose 
management's view of how material risk exposures are related and how 
risk mitigation actions are connected?
    175. To the extent we require disclosure of risk management and 
risk management processes, should we move the disclosure about the 
extent of a board of directors' oversight of risk from Item 407(h) to 
this new requirement? Similarly, should we move compensation risk 
disclosure to this new requirement, or should we otherwise provide an 
option for compensation risk disclosure to be given in the risk 
management discussion rather than in the compensation discussion?
    176. Should we require registrants to disclose their efforts to 
manage or mitigate each risk factor disclosed, similar to the risk 
management disclosure required for market risk under Item 
305(b)(1)(ii)? What are the challenges, including those associated with 
preparation and competitive harm, with this disclosure?
    177. Would additional disclosure about risk mitigation inhibit 
investors' ability to fully appreciate the significance of the risk? 
Would requiring a registrant to explain how it addresses a disclosed 
risk discourage registrants from disclosing generic or insignificant 
risks? Alternatively, would registrants provide boilerplate disclosure 
about how they address less meaningful risks, thereby resulting in even 
longer risk factor disclosure?
    178. Should we require registrants to address mitigation or 
management of each risk factor as part of the risk management 
discussion? If so, should we also clarify that, although references to 
the general risk management discussion will not satisfy this 
requirement, cross-references to appropriate portions of MD&A or the 
financial statements will, if disclosure otherwise would be redundant?
    179. Should we require registrants to disclose their known 
uncertainties about their risk management and risk management policies 
and how these might affect the registrant?
4. Consolidating Risk-Related Disclosure
    Outside of Items 503(c) and 305, a number of Items in Regulation S-
K elicit risk-related disclosures. These include Item 103, related to 
material litigation and certain environmental proceedings; Item 
101(d)(3), in connection with risk related to foreign operations; Item 
303(a), in that material trends, uncertainties, or events that are 
required to be described may also speak to certain risks; and Item 
407(h), regarding the extent of a board's role in risk oversight. In 
the S-K Study, the staff recommended that we consider whether to 
consolidate requirements relating to risk factors, legal proceedings, 
and other quantitative and qualitative information about risk and risk 
management into a single requirement.\540\ We seek input on whether 
investors would benefit from such a consolidation of risk-related 
disclosures and whether such a requirement would present any challenges 
to registrants.
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    \540\ See S-K Study at 99.

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[[Page 23961]]

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One comment letter supported 
the suggestion to consider consolidating all risk-related requirements, 
positing that consolidation would reduce redundant disclosure and 
provide investors with a ``holistic view of risk through the eyes of 
management.'' \541\ Another commenter recommended requiring better 
integration among the financial statements, business description, risk 
disclosures, market risk disclosures and the discussion of results in 
MD&A.\542\
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    \541\ See CCMC.
    \542\ See CFA Institute.
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b. Request for Comment
    180. Should we require registrants to provide a consolidated 
discussion of risk and risk management, including legal proceedings, in 
a single section of a filing? If so, what information should be 
included? How should this information be presented?
    181. How could investors benefit from a consolidated discussion of 
risk factors, legal proceedings and other quantitative and qualitative 
information about market risk and risk management? What would be the 
challenges of requiring such a presentation?
    182. How would a consolidation of risk-related disclosure affect 
the cost of preparing a filing, if at all?

D. Securities of the Registrant

    Disclosure about a registrant's capital stock and transactions by 
registrants in their own securities helps inform investment and voting 
decisions by providing investors with information about a security that 
can be useful in assessing its value. Several items in Regulation S-K 
require this and related disclosure about a registrant's securities:
     Item 202 requires a description of the terms and 
conditions of securities that are being registered; \543\
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    \543\ Item 202 of Regulation S-K [17 CFR 229.202]. Item 202 
disclosure is not required in Forms 10-Q or 10-K.
---------------------------------------------------------------------------

     Item 701 requires disclosure of recent sales of 
unregistered securities and use of proceeds from registered offerings 
of securities; \544\ and
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    \544\ Item 701 of Regulation S-K [17 CFR 229.701].
---------------------------------------------------------------------------

     Item 703 requires tabular disclosure of shares of equity 
securities purchased by the registrant and affiliated purchasers.\545\
---------------------------------------------------------------------------

    \545\ Item 703 of Regulation S-K [17 CFR 229.703].
---------------------------------------------------------------------------

    Additionally, Item 201(b)(1) requires disclosure of the number of 
holders of each class of a registrant's common equity.\546\ We are 
seeking public input on the disclosure requirements of Items 
201(b)(1),\547\ 202, 701 and 703 to help assess whether any of the 
disclosure requirements should be modified and whether we should add 
any new disclosure requirements. In addition, we welcome comment on the 
challenges for registrants related to complying with these disclosure 
requirements or any new disclosure requirements.
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    \546\ Item 201(b)(1) of Regulation S-K [17 CFR 229.201(b)(1)].
    \547\ As part of its work to develop recommendations for the 
Commission for potential changes to update or simplify the 
requirements, the staff is separately considering paragraphs (a), 
(c) and (d) of Item 201 relating to market information, the effect 
of an offering or business combination on shareholder ownership, 
dividends and securities authorized for issuance under equity 
compensation plans. For a description of this project, see Section 
I. Item 201(e) (performance graph) falls outside the scope of this 
release because this disclosure is required only in proxy 
statements.
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1. Related Stockholder Matters--Number of Equity Holders (Item 201(b))
    Item 201(b)(1) requires disclosure of the approximate number of 
holders of each class of common equity as of the latest practicable 
date.\548\ Instruction 3 to Item 201 specifies that the number of 
holders may be based upon the number of record holders or also may 
include individual participants in security position listings, as 
provided under Rule 17Ad-8 \549\ of the Exchange Act.\550\ Instruction 
3 to Item 201 provides that the method of computation chosen shall be 
indicated.
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    \548\ Id.
    \549\ Exchange Act Rule 17Ad-8 [17 CFR 240.17Ad-8]. The rule 
defines ``securities position listing,'' with respect to the 
securities of any issuer held by a registered clearing agency in the 
name of the clearing agency or its nominee, as a list of those 
participants in the clearing agency on whose behalf the clearing 
agency holds the issuer's securities and of the participants' 
respective positions in such securities as of a specified date. The 
rule also states that, upon request, a registered clearing agency 
must furnish a securities position listing promptly to each issuer 
whose securities are held in the name of the clearing agency or its 
nominee.
    \550\ Item 201 of Regulation S-K [17 CFR 229.201].
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended 
eliminating the requirement to disclose the number of security holders 
under Item 201(b), stating that it does not provide meaningful 
information since many stockholders hold their securities through a 
nominee.\551\
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    \551\ See Shearman.
---------------------------------------------------------------------------

b. Discussion
    Several decades ago, most investors of U.S. publicly traded 
registrants owned their securities in registered form, meaning that the 
securities were directly registered in the name of a specific investor 
on the record of security holders maintained by or on behalf of the 
registrant. Today, the vast majority of investors own their securities 
as a beneficial owner \552\ through a securities intermediary,\553\ 
such as a broker-dealer or bank.\554\ This is often referred to as 
holding securities in nominee or ``street name.'' The Commission first 
adopted a requirement to disclose the number of record holders of a 
class of securities in 1938, when it adopted the requirement that 
registrants submit proxy statements to each shareholder whose proxy is 
being solicited.\555\
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    \552\ We recognize the term ``beneficial owner'' and 
``beneficial ownership'' are defined in certain of our rules, such 
as under Exchange Act Rules 13d-3, 16a-1 and 14b-2. Our use of the 
term here is not intended to suggest that individuals holding in 
``street name'' are, or should be, ``beneficial owners'' for 
purposes of these Exchange Act rules. [17 CFR 240.13d-3; 17 CFR 
240.16a-1; 17 CFR 240.14b-2].
    \553\ For purposes of Commission rules pertaining to the 
transfer of certain securities, a ``securities intermediary'' is 
defined under Exchange Act Rule 17Ad-20 [17 CFR 240.17Ad-20] as a 
clearing agency registered under Exchange Act Section 17A [15 U.S.C. 
78q-1] or a person, including a bank, broker, or dealer, that in the 
ordinary course of its business maintains securities accounts for 
others in its capacity as such.
    \554\ In 1976, the Commission reported to Congress on the 
effects of the practice of registering securities in other than the 
name of the beneficial owner. In its report the Commission stated 
that 23.7% of shares were held in nominee and street name in 1964 
and 28.6% of shares were held in nominee and street name in 1975. 
Final Report of the Securities and Exchange Commission on the 
Practice of Recording the Ownership of Securities in the Records of 
the Issuer in Other than the Name of the Beneficial Owner of Such 
Securities Pursuant to Section 12(m) of the Securities Exchange Act 
of 1934, Dec. 3, 1976. Based on an analysis of available data over 
the period 2008 through 2010, the Commission's Division of Economic 
and Risk Analysis (``DERA'') estimates that over 85% of the holders 
of securities in the U.S. markets hold through a broker-dealer or a 
bank that is a DTC participant. More recently, and according to one 
study, shares held in street name continue to account for over 80% 
of all shares outstanding of U.S. publicly listed companies. See 
PricewaterhouseCoopers LLP, Proxy Pulse, Third Edition 2015 at 8.
    \555\ See Amended Proxy Rules, Release No. 34-1823 (Aug. 11, 
1938) [3 FR 1991 (Aug. 13, 1938)]. This rule required registrants to 
furnish, upon written request of the record holder being solicited, 
the approximate number of record holders of any specified class of 
securities of which any of the holders had been or were being 
solicited.
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    In 1964, the Commission proposed amending Form 10-K to require 
registrants to disclose, in addition to the number of record holders, 
the amount of each class of equity securities known by the registrant 
to be held ``in street names.'' \556\ Commenters generally opposed the 
proposal on the grounds that the required information would be 
difficult to obtain and of little use to investors, and the Commission 
decided

[[Page 23962]]

not to require disclosure of this information.\557\ In 1980, the 
Commission adopted Item 4 to Form 10-K, which consolidated disclosures 
relating to the market for the registrant's securities, including the 
number of holders of common stock, into a single item.\558\ As adopted, 
Item 4 to Form 10-K integrated the disclosure requirements of a new 
Item 9 in Regulation S-K, which the Commission adopted 
concurrently.\559\
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    \556\ See Annual Reports; Notice of Proposed Amendments, Release 
No. 34-7494 (Dec. 31, 1964) [30 FR 346 (Jan. 12, 1965)].
    \557\ See General Form for Annual Reports, Release No. 34-7545 
(Mar. 5, 1965) [30 FR 3430 (Mar. 16, 1965)] (``1965 Amendments to 
Form 10-K Adopting Release'').
    \558\ See 1980 Form 10-K Adopting Release (noting that the new 
item to Form 10-K constituted ``an amalgam'' of various other 
existing requirements.).
    \559\ Id. Among other things, Item 9 of Form 10-K required 
registrants to ``[s]et forth the approximate number of holders of 
common stock securities of the registrant as of the latest 
practicable date.'' Instruction 1 to Item 9 provided that the 
computation of the approximate number of holders ``may be based upon 
the number of record holders or may also include individual 
participants in security position listing.'' Id.
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    Item 201(b)'s reference to record holders is consistent with 
Section 12(g) of the Exchange Act. Section 12(g) requires issuers that 
are not banks, bank holding companies or savings and loan holding 
companies and have total assets exceeding $10 million to register a 
class of equity securities if the securities were ``held of record'' by 
either (i) 2,000 persons, or (ii) 500 persons who are not accredited 
investors.\560\ When Congress enacted Section 12(g) in 1964, most 
security holders in the United States owned their securities as record 
holders.
---------------------------------------------------------------------------

    \560\ 15 U.S.C. 781(g). See also supra note 14.
---------------------------------------------------------------------------

c. Request for Comment
    183. Should we retain or eliminate Item 201(b)(1)? Why? If 
retained, should we modify the item and if so, how?
    184. As the vast majority of investors now hold their shares in 
street name, does disclosure about the number of record holders 
continue to be important to investors? Should we require registrants to 
disclose the amount of each class of equity securities held in street 
name? Should we require registrants to disclose the number of 
beneficial owners? If so, how should we define ``beneficial owner'' for 
purposes of Item 201(b)(1)? How would investors benefit from this 
additional information? What would be the challenges registrants might 
face in tracking the number of beneficial owners?
    185. What types of investors or audiences are most likely to value 
the information required by Item 201(b)(1)?
2. Description of Capital Stock (Item 202)
    Item 202(a)-(d) and (f) requires a brief description of the capital 
stock, debt, warrants, rights, American Depositary Receipts or any 
other securities that are being registered.\561\
---------------------------------------------------------------------------

    \561\ Items 202(a)-(d) and (f) of Regulation S-K [17 CFR 
229.202(a)-(d) and (f)]. Item 202(e) is outside the scope of this 
release. This item 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. The staff is separately 
considering Item 201(a) in developing its recommendations for 
potential changes to update or simplify certain disclosure 
requirements. For a description of this project, see Section I.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. None.
b. Discussion
    Item 202 derives from Schedule A of the Securities Act, which 
requires disclosure of the capitalization of the registrant, including 
a description of the classes of capital stock and funded debt and any 
securities covered by options.\562\ These requirements were included in 
the earliest forms of registration statements.\563\ As part of revision 
and simplification efforts in 1947, the Commission amended this 
requirement to eliminate the description of securities that are not 
being registered, except to the extent material to an evaluation of the 
securities being registered.\564\ In 1982, Item 202 was included in 
Regulation S-K \565\ as part of the ``offering-oriented items'' \566\ 
and is currently required only in registration statements and some 
proxy statements.\567\
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    \562\ Paragraphs 9-12 of Schedule A of the Securities Act [15 
U.S.C. 77aa(9)-(12)].
    \563\ See Form A-2, Items 9 through 20. Tabular disclosure 
included details about amounts authorized, amounts outstanding, 
related balance sheet information, amounts held in treasury, amounts 
held by subsidiaries and parent companies, amounts reserved for 
officers and employees and amounts reserved for options and 
warrants. See S-K Study at footnote 238.
    \564\ See Miscellaneous Amendments, Release No. 33-3186 (Jan. 8, 
1947) [12 FR 224 (Jan. 15, 1947)]. See also Notice of Proposed Rules 
and Form and Proposed Repeal of Certain Forms, Release No. 33-3171 
(Nov. 18, 1946) [11 FR 13764 (Nov. 22, 1946)].
    \565\ See 1982 Integrated Disclosure Adopting Release. In adding 
Item 202 of Regulation S-K, the Commission revised the item to 
require registrants to discuss the effect on control of the company 
of certain charter and bylaw antitakeover provisions. Item 202(a)(5) 
of Regulation S-K [17 CFR 229.202(a)(5)].
    \566\ See Reproposal of Comprehensive Revision to System for 
Registration of Securities Offerings, Release No. 33-6331 (Aug. 6, 
1981) [46 FR 41902 (Aug. 18, 1981)] at 41917.
    \567\ See, e.g., Item 9 of Form S-1, Item 9 of Form S-3 and Item 
1 of Form 8-A. Item 202 disclosure is also required in proxy 
statements with respect to the authorization or issuance of 
securities or the modification or exchange of any class of 
securities of a registrant. See Items 11 and 12 of Schedule 14A [17 
CFR 240.14a-101].
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    While registrants are required to file as exhibits complete copies 
of their articles of incorporation and bylaws as currently in effect, 
registrants are not required to describe these documents or their 
registered securities in their periodic filings.\568\ A summary 
description of the material terms and conditions of the registrant's 
securities, as provided under Item 202, is not required in periodic 
reports and most registrants do not include such disclosure. To find 
this information, investors typically must locate this disclosure 
either in the registrant's exhibits, as amended, or in the registrant's 
Form 8-A, which often incorporates by reference from a prior Form S-1.
---------------------------------------------------------------------------

    \568\ See Item 601(b)(3) of Regulation S-K [17 CFR 
229.601(b)(3)]. Under ASC 505-10-50-3, registrants are required to 
summarize the ``pertinent rights and privileges of the various 
securities outstanding.''
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    Changes in the terms and conditions of registered securities are 
disclosed in Form 8-K and Schedule 14A, which require discussion of 
modifications to the rights of any class of securities and amendments 
to the articles of incorporation or bylaws.\569\ Frequently, these 
disclosures report discrete and specific changes to the overall terms 
and conditions of the registered securities such as individual 
amendments to the articles of incorporation to increase the number of 
shares authorized. A Form 8-K filed to report an amendment to the 
articles of incorporation or bylaws may be limited to the text of the 
amendment, however, the registrant must file a

[[Page 23963]]

complete copy of the articles of incorporation or bylaws with its next 
Securities Act registration statement or periodic report.\570\ We are 
seeking public input on whether a comprehensive discussion of 
registered securities in periodic reports would facilitate access to 
important disclosure for investors in the secondary market.
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    \569\ Item 3.03 of Form 8-K requires disclosure of material 
modifications to rights of security holders while Item 5.03 requires 
disclosure of amendments to the articles of incorporation or bylaws 
for amendments not disclosed in a proxy or information statement. 
Item 5.03 of Form 8-K also requires disclosure of changes in fiscal 
year other than by means of a submission to a vote of security 
holders through the solicitation of proxies (or otherwise) or an 
amendment to the articles of incorporation or bylaws [17 CFR 
249.308].
    Item 12 of Schedule 14A requires disclosure if action is to be 
taken regarding the modification of any class of securities of the 
registrant, or the issuance or authorization for issuance of 
securities of the registrant in exchange for outstanding securities. 
Section (b) of Item 12 requires disclosure of any material 
differences between the outstanding securities and the modified or 
new securities in respect of any of the matters concerning which 
information would be required in the description of the securities 
in Item 202 of Regulation S-K. Item 19 of Schedule 14A requires 
disclosure of amendments to the charter, bylaws or other documents.
    \570\ See Item 601(b)(3) of Regulation S-K [17 CFR 
229.601(b)(3)].
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c. Request for Comment
    186. How do investors in the secondary market access information 
about the terms and conditions of a registrant's securities? Do 
investors rely only on the bylaws and articles of incorporation filed 
as exhibits to the registrant's Form 10-K?
    187. In addition to the disclosure requirements in registration 
statements and certain proxy statements, should we require registrants 
to provide Item 202 disclosure each year in Form 10-K? Would requiring 
this information in the annual report facilitate investor access to 
important disclosure? Should we require registrants to disclose in 
their quarterly and annual reports whether changes have been made to 
the terms and conditions of their securities during the reporting 
period? Why? Are the Form 8-K requirements sufficient?
    188. What types of investors or audiences are most likely to value 
the information required by Item 202?
    189. What is the cost of providing the disclosure required by Item 
202, including the administrative and compliance costs of preparing and 
disseminating this disclosure? How would these costs change if we made 
any of the changes contemplated here? Please provide quantified 
estimates where possible and include only those costs associated with 
providing disclosure under Item 202.
    190. What are the benefits of providing the disclosure required by 
Item 202? How could the benefits change if we made any of the changes 
contemplated here? Please provide quantified or qualitative estimates 
where possible relating to disclosure under Item 202.
3. Recent Sales of Unregistered Securities (Items 701(a)-(e))
    Item 701(a)-(e) requires disclosure of all sales of unregistered 
securities sold by the registrant within the past three years and 
specifies disclosure of: The date, title and amount of securities sold; 
the principal underwriters and other purchasers, if the securities were 
not publicly offered; the aggregate offering price for securities sold 
for cash and the nature of the transaction and the nature and aggregate 
amount of consideration received by the registrant; the exemption from 
registration claimed; and the terms of conversion or exercise.\571\ 
These disclosure requirements also apply to securities issued in 
exchange for property, services, or other securities.\572\
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    \571\ Item 701(a)-(e) of Regulation S-K [17 CFR 229.701(a)-(e)]. 
For a discussion of Item 701(f), see Section IV.D.4.
    \572\ Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. Two commenters stated that disclosure of Item 701 
information is not meaningful for investors.\573\ They also stated that 
such disclosure should not be required in registration statements 
because, to the extent recent sales of securities are material to 
investors, registrants would be required to disclose that information 
in their discussion of liquidity and capital resources under MD&A 
pursuant to Items 303(a)(1) and (2).\574\
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    \573\ See Silicon Valley and M. Liles (also stating that cash 
flow statements would contain ``more detailed information'' about 
the proceeds of securities issuances in those periods, as would the 
statements of stockholders' equity for the sales of equity 
securities).
    \574\ See id. Both commenters also noted that registrants would 
be required to disclose the terms of any material sales of 
securities made to related persons pursuant to Item 404.
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    Disclosure Effectiveness Initiative. One commenter recommended that 
the disclosure of sales of unregistered securities be limited to sales 
that are material to the issuer.\575\ This commenter also suggested 
reconciling the disclosure requirements of Item 701, which requires 
disclosure of all unregistered sales of common equity, with those of 
Item 3.02 of Form 8-K, which does not require disclosure of sales of 
less than one percent of the number of shares outstanding of the equity 
securities being sold. Another commenter recommended eliminating Item 
701, noting overlap with Form 8-K and also stating that, for a material 
sale of securities, registrants typically discuss the transaction in 
MD&A.\576\
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    \575\ See SCSGP.
    \576\ See CCMC.
---------------------------------------------------------------------------

b. Discussion
    Item 701's requirement to disclose recent sales of unregistered 
securities is based, in part, on Schedule A.\577\ A disclosure 
requirement in Form S-1 \578\ of sales of unregistered securities for 
the past three years predated Regulation S-K.\579\ The requirement was 
moved to Regulation S-K in connection with adoption of the integrated 
disclosure system, but it continued to apply only to certain 
registration statements.\580\
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    \577\ Paragraph 19 of Schedule A of the Securities Act is 
broader than Item 701 because it calls for the net proceeds derived 
from any security sold by the issuer during the two years preceding 
the filing of the registration statement, including the price at 
which such security was offered. See Securities Act of 1933 Schedule 
A Paragraph 19 [15 U.S.C. 77aa(19)]. Other differences include Item 
701's three-year timeframe, as opposed to two years in Schedule A, 
and the fact that Item 701 is limited to unregistered sales of 
equity securities while Schedule A contains neither of these 
limitations.
    \578\ 17 CFR 239.11.
    \579\ See, e.g., Adoption of Amendments to Form S-1, Release No. 
33-3434 (Jan. 31, 1952) [17 FR 1177 (Feb. 7, 1952)] (adopting 
disclosure requirements to Form S-1 substantially similar to current 
Item 701(a)-(e) of Regulation S-K). See also 1980 Proposed Revisions 
(noting that the requirement to disclose sales of unregistered 
securities during the past three years in proposed Form C was the 
same as in Item 25 of Form S-1 at that time).
    \580\ See 1982 Integrated Disclosure Adopting Release. When Item 
701 was moved to Regulation S-K, this disclosure was required in 
Forms 10-Q, S-1, S-11 and 10. The Commission had adopted a similar 
requirement for Forms 10-K and 10-Q in 1972. See Adoption of 
Amendments to Annual Report Form 10-K and Quarterly Report Form 10-Q 
Under the Securities Exchange Act of 1934, Release No. 34-9443 (Jan. 
10, 1972) [37 FR 601 (Jan. 14, 1972)]. The Commission eliminated 
this requirement from Form 10-K in 1980, consistent with 
recommendations by the Sommer Report. See 1980 Form 10-K Adopting 
Release. According to the Sommer Report, the requirement was 
unnecessary in Form 10-K because the same information was available 
in the financial statements and required to be disclosed in Form 10-
Q. See Sommer Report at 486.
---------------------------------------------------------------------------

    In 1996, the Commission adopted amendments to require timely 
disclosure of unregistered equity offerings and amended Forms 10-K and 
10-Q to include Item 701(a)-(e).\581\ This amendment was intended to 
address concerns that unregistered offerings were frequently 
undisclosed and such offerings could materially affect the financial 
condition of registrants or result in significant dilution to existing 
shareholders.\582\ The Commission also expanded Item 701 to require 
registrants to disclose terms of conversion or exercise for convertible 
or exchangeable equity securities.\583\
---------------------------------------------------------------------------

    \581\ See Periodic Reporting of Unregistered Equity Sales, 
Release No. 34-37801 (Oct. 10, 1996) [61 FR 54506 (Oct. 18, 1996)] 
(``Periodic Reporting of Unregistered Equity Sales Release'').
    \582\ See, e.g., Streamlining Disclosure Requirements Relating 
to Significant Business Acquisitions and Requiring Quarterly 
Reporting of Unregistered Equity Sales, Release No. 33-7189 (Jun. 
27, 1995) [60 FR 35656 (July 10, 1995)] (expressing concern about 
the lack of disclosure in the context of addressing issues with 
Regulation S offerings); Periodic Reporting of Unregistered Equity 
Sales Release.
    \583\ See id. See also Item 701(e) of Regulation S-K [17 CFR 
229.701(e)].
---------------------------------------------------------------------------

    In 2004, the Commission sought more timely disclosure of 
unregistered equity offerings and added Item 3.02 to Form 8-K. Item 
3.02 requires registrants to

[[Page 23964]]

disclose, within four business days,\584\ the information specified in 
paragraphs (a) and (c) through (e) of Item 701 \585\ when aggregate 
equity securities sold are equal to or exceed one percent of the number 
of shares outstanding of the class of equity securities sold.\586\ The 
Commission initially proposed to move the Item 701 disclosure 
requirement out of Forms 10-Q and 10-K and into Form 8-K.\587\ This 
proposal was based on the Commission's belief that more timely 
disclosure of this information would benefit investors due to the 
potentially significant dilutive effect on existing investors' 
holdings.\588\ In response to comments on the proposing release, the 
Commission adopted the one percent threshold for disclosure on Form 8-
K, noting that registrants would still be required to report all other 
unregistered sales of equity securities in their periodic reports.\589\ 
Concurrently, the Commission revised Forms 10-K and 10-Q to require 
disclosure only of unregistered sales of equity securities not 
previously disclosed on Form 8-K.\590\
---------------------------------------------------------------------------

    \584\ See Item 3.02(a) of Form 8-K (stating the registrant has 
no obligation to disclose information under this Item 3.02 until the 
registrant enters into an agreement enforceable against the 
registrant, whether or not subject to conditions, under which the 
equity securities are to be sold. If there is no such agreement, the 
registrant must provide the disclosure within four business days 
after the occurrence of the closing or settlement of the transaction 
or arrangement under which the equity securities are to be sold).
    \585\ See 2004 Form 8-K Adopting Release.
    \586\ Item 3.02(b) of Form 8-K. SRCs are not required to file a 
Form 8-K if the securities sold, in the aggregate, constitute less 
than five percent of the number of shares outstanding of the class 
of equity securities sold.
    \587\ Additional Form 8-K Disclosure Requirements and 
Acceleration of Filing Date, Release No. 33-8106 (June 17, 2002) [67 
FR 42914 (June 25, 2002)] (``2002 Form 8-K Proposing Release'').
    \588\ See id. The Commission solicited comment on whether there 
was value to requiring the ``aggregate listing'' of sales made 
during quarterly and annual periods even though Form 8-K would 
report each sale as it occurred. The Commission also solicited 
comment on the question of whether the Form 8-K disclosure should be 
limited to large unregistered sales and suggested possible 
disclosure thresholds equal to a percentage of the company's 
outstanding shares or a percentage of the company's market float. 
See id. at 42923.
    \589\ See 2004 Form 8-K Adopting Release at 15603 (``In response 
to concerns raised by commenters, we have limited the disclosure of 
sale of unregistered equity securities required to be filed on Form 
8-K. Under the new item, no Form 8-K need be filed if the equity 
securities sold in the aggregate since the company's last report 
filed under this item or last periodic report, whichever is more 
recent, constitute less than 1% of the company's outstanding 
securities of that class.'').
    \590\ See id. Item 701 information need not be disclosed in a 
Form 10-K if it has been previously included in a Form 10-Q or Form 
8-K. See Item 5(a) of Form 10-K. Similarly, Item 701 information 
need not be disclosed in a Form 10-Q if it has been previously 
disclosed in a Form 8-K. See Item 2(a) of Part II of Form 10-Q.
---------------------------------------------------------------------------

    Some of the disclosure required by Item 701(a)-(e) may overlap with 
disclosure in the statement of stockholders' equity, which is required 
in the annual financial statements,\591\ or in the notes to the 
financial statements. For example, under U.S. GAAP, registrants must 
disclose the number of shares sold, title of class of stock sold and 
net proceeds.\592\ Registrants are also required to discuss the rights 
and privileges of the securities outstanding, such as conversion or 
exercise prices and pertinent dates.\593\ On the other hand, U.S. GAAP 
does not require disclosure of underwriters, underwriting discounts, 
the exemption claimed or the identity of the purchasers, as required by 
Item 701. In addition, accounting standards do not distinguish between 
registered and unregistered sales of securities.
---------------------------------------------------------------------------

    \591\ Rule 3-04 of Regulation S-X [17 CFR 210.3-04]. Registrants 
are not required to provide a statement of stockholders' equity with 
their interim financial statements.
    \592\ See ASC Topic 505-10-50-2. Registrants are not required to 
disclose the aggregate offering price.
    \593\ See ASC Topic 505-10-50-3. ASC Topic 470-10-50-5 requires 
the same information for debt securities. While the date of sale is 
not required, registrants usually include it in their discussions of 
the rights and privileges of securities sold.
---------------------------------------------------------------------------

c. Request for Comment
    191. Should we retain or eliminate Item 701(a)-(e)? Why? Does the 
disclosure required under Item 701(a)-(e) provide important information 
that is not available in either MD&A or the financial statements?
    192. Does the Item 3.02 of Form 8-K disclosure requirement for 
issuances of one percent or greater and the Item 701 requirement for 
all issuances strike the right balance between disclosing larger 
issuances promptly and all others quarterly? Is one percent an 
appropriate threshold? If not, what would be an appropriate threshold 
and why?
    193. Should we revise Forms 10-K and 10-Q to require disclosure of 
all unregistered sales of securities during the reporting period, 
including those already reported on Form 8-K? What would be the 
benefits to investors? Alternatively, should we require registrants to 
cross-reference or include a hyperlink to any previously filed Form 8-K 
containing Item 701 information for the reporting period or incorporate 
such forms by reference? What would be the advantages or disadvantages 
associated with either of these approaches?
    194. Should we remove the Item 701 disclosure requirement from 
Forms 10-K and 10-Q? If so, should we revise Item 3.02 of Form 8-K to 
remove the one percent threshold and require registrants to disclose 
all unregistered sales of securities on Form 8-K? Alternatively, should 
we eliminate Item 3.02 of Form 8-K and instead require disclosure only 
in Forms 10-K and 10-Q?
    195. Disclosure provided in response to Item 701(a)-(e) can range 
from a single paragraph to multiple pages. In Form 10-K, this 
disclosure is provided as part of Item 5 of Part II (Market for 
Registrant's Common Equity, Related Stockholder Matters and Issuer 
Purchases of Equity Securities) while in Form 10-Q this disclosure is 
provided as Item 2 of Part II (Unregistered Sales of Equity Securities 
and Use of Proceeds). Should we require this disclosure where it 
currently appears, in the context of the liquidity discussion in MD&A, 
or elsewhere?
    196. Do registrants face any particular challenges in complying 
with the item's disclosure requirements?
4. Use of Proceeds From Registered Securities (Item 701(f))
    Item 701(f) requires a registrant to disclose the use of proceeds 
from its first registered offering.\594\ The registrant must provide 
the following disclosure in its first Exchange Act periodic report 
after effectiveness of the Securities Act registration statement:
---------------------------------------------------------------------------

    \594\ Item 701(f) of Regulation S-K [17 CFR 229.701(f)].
---------------------------------------------------------------------------

     The effective date of the Securities Act registration 
statement;
     the offering date or an explanation of why the offering 
has not commenced;
     if the offering terminated before any securities were 
sold, an explanation of the termination;
     if the offering did not terminate before any securities 
were sold, registrants must disclose (i) whether the offering has 
terminated and, if so, whether it terminated before the sale of all 
securities registered; (ii) the names of the managing underwriters, if 
any; (iii) the title of each class of securities registered; (iv) for 
each class of securities, the amount registered, the aggregate offering 
price of the amount registered, the amount sold, and the aggregate 
offering price of the amount sold to date; (v) the amount of expenses 
incurred by the registrant in connection with the issuance and 
distribution of the securities registered; (vi) net offering proceeds 
after deducting expenses; (vii) the amount of net offering proceeds 
used for certain enumerated purposes; and (viii) a brief description of 
any material change from the prospectus disclosure about the use of 
proceeds.\595\
---------------------------------------------------------------------------

    \595\ Id.
---------------------------------------------------------------------------

    Item 701(f) requires registrants to provide disclosure in each 
subsequent

[[Page 23965]]

periodic report to the extent it has changed since the last periodic 
report filed. Registrants must continue to provide this disclosure 
until the application of all of the offering proceeds or termination of 
the offering.
a. Comments Received
    S-K Study. Two commenters recommended eliminating Item 701(f), 
indicating the requirement does not result in useful information for 
investors since companies cannot necessarily determine whether a dollar 
spent was derived from revenue or from the net proceeds of a securities 
offering, and that the discussion of cash flow in MD&A should already 
address material uses of cash.\596\
---------------------------------------------------------------------------

    \596\ See Silicon Valley; M. Liles.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. None.
b. Discussion
    The precursor to Item 701(f) originated in Rule 463 of the 
Securities Act, which was adopted with related Form SR in 1971.\597\ In 
proposing this rule, the Commission noted that disclosure about the 
progress of an offering of registered securities would enable the 
Commission to know whether the registrant is required to file and use 
an updated Section 10(a)(3) prospectus and whether ``dealers effecting 
transactions in the registered security must furnish a copy of the 
prospectus to purchasers.'' \598\ The Commission further noted that, if 
registrants have used offering proceeds for purposes different from 
those stated in the prospectus, investors may have been misled as to 
the purposes for which the funds supplied by them would be applied. 
Information about the actual use of proceeds following the offering 
would indicate whether statements in the prospectus were borne out by 
the registrant's subsequent actions.\599\
---------------------------------------------------------------------------

    \597\ See Adoption of Rule 463 and Form SR Requiring Reports by 
First-Time Registrants of Sales of Registered Securities and Use of 
Proceeds Therefrom, Release No. 33-5141 (Apr. 19, 1971) [36 FR 7896 
(Apr. 28, 1971)] (``Rule 463 Adopting Release''). Form SR was a 
stand-alone report required to be filed once every six months 
following the effective date of a registrant's first Securities Act 
registration statement.
    \598\ Notice of Proposal to Require Reports by First-Time 
Registrants of Sales of Registered Securities and Use of Proceeds 
Therefrom, Release No. 33-5130 (Feb. 8, 1971) [36 FR 3429 (Feb. 24, 
1971)] at 3430.
    \599\ See id. As adopted, Rule 463 did not require a Form SR to 
be filed with respect to any offering of securities issued by any 
investment company registered under the Investment Company Act of 
1940; any public utility company or public utility holding company 
required to file reports with any state or federal authority; or 
with respect to American depositary receipts for foreign securities. 
See Rule 463 Adopting Release.
---------------------------------------------------------------------------

    In 1980, the Commission proposed revisions to Rule 463 and Form SR 
to require, among other things, disclosure of use of proceeds beyond 
first-time registered offerings.\600\ After considering comments on the 
proposal, the Commission concluded it was not clear that the benefits 
from such an extension would outweigh the additional reporting burdens 
imposed on registrants.\601\ At the same time, the Commission affirmed 
the use of Form SR for first-time issuers and noted that commenters 
generally did not object to the use of Form SR to elicit information 
about use of proceeds from first-time issuers.\602\
---------------------------------------------------------------------------

    \600\ See Report of Sales of Securities, Release No. 33-6251 
(Oct. 23, 1980) [45 FR 71811 (Oct. 30, 1980)]. The proposed 
requirement was intended to facilitate the determination of whether 
an issuer of a direct distribution or a best efforts underwritten 
offering that was not a first-time offering was complying with the 
prospectus delivery and updating requirements of Sections 4(3) and 
10(a)(3) of the Securities Act.
    \601\ See Report of Sales of Securities and Use of Proceeds, 
Release No. 33-6346 (Sept. 21, 1981) [46 FR 48137 (Oct. 1, 1981)].
    \602\ See id.
---------------------------------------------------------------------------

    In 1997, the Commission eliminated Form SR and adopted Item 701(f) 
to require disclosure about the use of offering proceeds in periodic 
reports.\603\ The Commission stated its belief that relocating the 
disclosure to periodic reports would make it more accessible to 
investors, since periodic reports were more commonly monitored by the 
public than Form SR.\604\ The adoption of Item 701(f) led to use of 
proceeds information being reported on a quarterly basis instead of 
semi-annually through Form SR.
---------------------------------------------------------------------------

    \603\ See Phase Two Recommendations of Task Force on Disclosure 
Simplification Release.
    \604\ See id. The Commission also noted that consolidating the 
disclosure requirements into the periodic report forms should ease 
reporting burdens on registrants by reducing the number of forms 
required to be filed.
---------------------------------------------------------------------------

    Other disclosure requirements may elicit information about the use 
of offering proceeds. For example, registrants may disclose the 
proceeds from initial public offerings as a material source of cash in 
the liquidity discussion within MD&A.\605\ Changes in a registrant's 
statement of cash flow and statement of stockholders' equity in the 
financial statements may also indicate the progress of its initial 
registered offering. However, certain information about the progress of 
an offering, such as when a registrant has not commenced an offering or 
the offering is terminated before any securities were sold, may not be 
available to investors outside of disclosures required by Item 701(f).
---------------------------------------------------------------------------

    \605\ See Item 303(a)(1) of Regulation S-K [17 CFR 
229.303(a)(1)] (requiring registrants to discuss and analyze 
``internal and external sources of liquidity'') and Item 
303(a)(2)(ii) of Regulation S-K (requiring registrants to discuss 
and analyze any known material trends, favorable or unfavorable, in 
capital resources, including changes between equity, debt and any 
off-balance sheet financing arrangements).
---------------------------------------------------------------------------

c. Request for Comment
    197. Should we retain or eliminate disclosure about the use of 
offering proceeds required by Item 701(f)? Why? If we retain this 
requirement, how could we improve it? For example, should we modify the 
item, such as by expanding it to offerings other than a registrant's 
first registered offering or by requiring other additional disclosure? 
Why?
    198. In Form 10-K, this disclosure is provided as part of Item 5 of 
Part II (Market for Registrant's Common Equity, Related Stockholder 
Matters and Issuer Purchases of Equity Securities) while in Form 10-Q 
this disclosure is provided as Item 2 of Part II (Unregistered Sales of 
Equity Securities and Use of Proceeds). Should we require this 
information in its current location, in the context of liquidity or 
elsewhere? Should we require disclosure only if the actual use of 
proceeds differs materially from the description of the offering?
5. Purchases of Equity Securities by the Issuer and Affiliated 
Purchasers (Item 703)
    Item 703 requires tabular disclosure of purchases of registered 
equity securities by the registrant or any affiliated purchaser 
including:
     Total number of shares repurchased;
     average price paid per share;
     total number of shares purchased as part of publicly 
announced plans or programs; and
     maximum number (or approximate dollar value) of shares 
that may yet be purchased under the plans or programs.\606\
---------------------------------------------------------------------------

    \606\ Item 703 of Regulation S-K [17 CFR 229.703].
---------------------------------------------------------------------------

    Item 703 also requires footnote disclosure of (1) the date each 
plan or program was announced, (2) the dollar amount (or share amount) 
approved, (3) the expiration date (if any) of each plan or program, (4) 
each plan or program that has expired during the period covered by the 
table, and (5) each plan or program the registrant has determined to 
terminate prior to expiration, or under which the issuer does not 
intend to make further purchases.\607\
---------------------------------------------------------------------------

    \607\ Instruction 2 to paragraphs (b)(3) and (b)(4) of Item 703 
of Regulation S-K [17 CFR 229.703].
---------------------------------------------------------------------------

    Item 703 requires disclosure for each month included in the period 
covered by the report. Form 10-Q requires this information for any 
equity repurchase made in the quarter covered by the

[[Page 23966]]

report,\608\ while Form 10-K requires this disclosure for repurchases 
made in the fourth fiscal quarter of the registrant's fiscal year.\609\
---------------------------------------------------------------------------

    \608\ Item 2(c) of Part II of Form 10-Q [17 CFR 249.308a].
    \609\ Item 5(c) of Form 10-K [17 CFR 249.310].
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended the 
Commission and the FASB coordinate efforts to review and clarify the 
different disclosure objectives of Item 703 and U.S. GAAP to determine 
whether both requirements continue to provide distinct and useful 
information.\610\ This commenter also recommended, alternatively, that 
if the Commission and the FASB determine that the requirements are 
still useful, that they issue joint guidance on how both requirements 
should work together.
---------------------------------------------------------------------------

    \610\ See SCSGP (specifying overlap between Item 703 and ASC 
Topic 505).
---------------------------------------------------------------------------

    Another commenter recommended enhanced disclosure of the ``pros'' 
and ``cons'' of share repurchase programs by addressing, among other 
things, (i) the time period specified for each program, (ii) the 
maximum number of shares authorized by the board to be repurchased, 
(iii) the cash (including any borrowings) spent on repurchases and 
dividends compared to that spent on reinvestment, and (iv) the impact 
of repurchase programs on corporate indebtedness.\611\ This commenter 
also recommended that companies consider disclosing the sources of 
funds to finance stock buybacks.
---------------------------------------------------------------------------

    \611\ See letter from William J. Klein and Thomas J. Amy (May 
12, 2015) (``Klein and Amy 3'').
---------------------------------------------------------------------------

b. Discussion
    In 2003, the Commission adopted Item 703 to increase the 
transparency of security repurchases by registrants and their 
affiliates and to inform investors of registrants' stated repurchasing 
intentions and subsequent repurchases.\612\ The Commission noted in the 
adopting release that public announcement of a repurchase is often 
followed by a rise in the registrant's stock price, and that studies 
have shown some registrants publicly announce repurchase programs but 
either do not repurchase shares or only repurchase a small portion of 
the publicly disclosed amount. Item 703 was intended to inform 
investors whether, and to what extent, registrants follow through on 
their original repurchase plans and to provide investors with 
information that could affect a registrant's stock price.\613\
---------------------------------------------------------------------------

    \612\ See Purchases of Certain Equity Securities by the Issuer 
and Others, Release No. 33-8335 (Nov. 10, 2003) [68 FR 64952 (Nov. 
17, 2003)].
    \613\ See id.
---------------------------------------------------------------------------

    In recent years, stock repurchases by registrants have increased 
significantly.\614\ According to media reports, since 2004 U.S. 
companies have spent nearly $7 trillion repurchasing their own 
shares.\615\ Common reasons for engaging in repurchases include 
returning excess cash to shareholders,\616\ boosting earnings per share 
\617\ and offsetting share dilution resulting from employee benefit 
plans.\618\ Repurchases typically affect earnings per share by reducing 
the amount of shares outstanding,\619\ except when repurchased shares 
are distributed to employees as compensation. Recent studies have found 
that, since the Commission adopted Item 703, registrants have announced 
smaller open market repurchases \620\ and have completed announced open 
market repurchases at a higher rate.\621\
---------------------------------------------------------------------------

    \614\ See, e.g., Oliver Renick and Michael P. Regan, Getting 
High on Their Own Supply, Bloomberg Businessweek, July 16, 2015, 
available at https://www.bloomberg.com/news/articles/2015-07-16/corporate-stock-buybacks-make-earnings-look-better (citing data that 
companies in the S&P 500 spent more than $550 billion in stock 
repurchases in 2014); John Waggoner, Beware the Stock-Buyback Craze, 
The Wall Street Journal, June 19, 2015, available at https://www.wsj.com/articles/beware-the-stock-buyback-craze-1434727038 
(noting that stock repurchases are returning to pre-financial crisis 
levels and citing research indicating that companies in the S&P 500 
repurchased about $148 billion of their own shares in the first 
quarter of 2015); Audit Analytics, Research and Development Up 
Despite Stock Buybacks, June 15, 2015, available at https://www.auditanalytics.com/blog/research-and-development-up-despite-stock-buybacks (citing research that stock buybacks have surpassed 
$2.1 trillion since the beginning of the first quarter of 2009 among 
S&P 500 companies).
    \615\ See Andrew Ross Sorkin, Stock Buybacks Draw Scrutiny from 
Politicians, The New York Times, Aug. 10, 2015, available at https://www.nytimes.com/2015/08/11/business/stock-buybacks-draw-scrutiny-from-politicians.html (citing data from Mustafa Erdem Sakinc of the 
Academic-Industry Research Network).
    \616\ See, e.g., Maxwell Murphy and John Kester, Buybacks Can 
Juice Per-Share Profit, Pad Executive Pay, The Wall Street Journal, 
Oct. 19, 2014, available at https://www.wsj.com/articles/buybacks-can-juice-per-share-profit-executive-pay-1414453356 (``Murphy and 
Kester'').
    \617\ See, e.g., Maxwell Murphy, The Big Number, The Wall Street 
Journal, Apr. 6, 2015, available athttps://www.wsj.com/articles/the-big-number-1428362150 (``Murphy'').
    \618\ See, e.g., Gerrit De Vynck, BlackBerry Plans Share Buyback 
to Offset Employee Incentives, Bloomberg Business, May 21, 2015, 
available at https://www.bloomberg.com/news/articles/2015-05-21/blackberry-planning-share-buyback-to-offset-employee-incentives; 
Ford Announces $1.8 Billion Share Buyback Program, Can Reduce Debt, 
Chicago Tribune, May 7, 2014, available at https://articles.chicagotribune.com/2014-05-07/marketplace/sns-rt-us-ford-stocks-buyback-20140507_1_ford-motor-co-ford-stock-103-million-shares. See also Karen Brettell, David Gaffen and David Rohde, The 
Cannibalized Company, Reuters, Nov. 16, 2015, available at https://www.reuters.com/investigates/special-report/usa-buybacks-cannibalized (stating that the prevalence of share repurchases is 
the result of several factors: Pressure from activist investors; 
executive compensation programs that tie pay to earnings per share 
and share prices; increased global competition; and ``fear of making 
long-term bets on products and services that may not pay off'').
    \619\ See E.S. Browning, Is the Surge in Stock Buybacks Good or 
Evil?, The Wall Street Journal, Nov. 22, 2015, available at https://www.wsj.com/articles/is-the-surge-in-stock-buybacks-good-or-evil-1448188684; Murphy and Kester. See also Murphy (noting that 22 
companies in the S&P 500 reported lower profits but still posted 
flat or positive earnings per share in 2014 solely from share 
repurchases, and that 308 companies in the index ended the year with 
fewer shares outstanding).
    \620\ See Alice A. Bonaim[eacute], Mandatory Disclosure and Firm 
Behavior: Evidence from Share Repurchases, 90 Accounting Review 4, 
1333 (2015) (``Bonaim[eacute] 2015'').
    \621\ See Michael Simkovic, The Effect of Mandatory Disclosure 
on Open Market Repurchases, 6 Berkley Bus. L.J. 1, 96 (2009) 
(comparing a sample of post-2003 open market repurchases with 
literature on open market repurchases predating Item 703); 
Bonaim[eacute] 2015.
---------------------------------------------------------------------------

    The staff has observed that registrants generally comply with the 
item requirements but often do not analyze the impact of stock 
repurchases in the context of MD&A. Even when the amount used to 
repurchase shares exceeds a registrant's net income or cash generated 
from operating activities for the reporting period, registrants do not 
always analyze these repurchases in MD&A.
    While some of the disclosure required under Item 703 overlaps with 
requirements under U.S. GAAP,\622\ there are differences between the 
two standards. Item 703 disclosure is required on a quarterly basis 
while U.S. GAAP requires annual disclosure. Additionally, disclosure 
requirements under U.S. GAAP vary depending on the type of transaction 
through which shares are repurchased, and in some situations U.S. GAAP 
disclosures are more extensive than those required under Item 703.\623\ 
Disclosure provided

[[Page 23967]]

under U.S. GAAP is also audited, unlike Item 703 disclosure. Typically, 
registrants provide disclosure about share repurchases in both the 
notes to the financial statement and in non-financial statement 
disclosures.
---------------------------------------------------------------------------

    \622\ The dollar amount and the number of shares repurchased are 
disclosed in the annual Statement of Shareholders' Equity, because 
U.S. GAAP requires the repurchase of stock to be deducted from 
capital stock, additional paid-in capital, and retained earnings. 
See ASC Topics 505-10-50, 505-30-30 and Rule 3-04 of Regulation S-X. 
This financial statement presents shareholders' equity activity in a 
roll forward of each of the shareholders' equity components from the 
beginning to the end of the annual period. Article 10 of Regulation 
S-X does not require an interim period statement of shareholders 
equity. Instead, Rule 10-01(a)(5) requires disclosure of events 
subsequent to the end of the most recent fiscal year that have 
occurred which have a material impact on the registrant.
    \623\ For example, for shares repurchased through accelerated 
share repurchase programs, registrants must disclose the nature and 
terms of the arrangement with the seller from which the registrant 
is acquiring its shares, including the number of shares subject to 
the contract, per share price terms and settlement options 
available. See ASC Topic 815-40-50-5.
---------------------------------------------------------------------------

    While Item 703 requires disclosure of all monthly repurchases on a 
quarterly basis,\624\ other jurisdictions require this disclosure more 
frequently.\625\ We seek comment on whether we should require more 
frequent or more granular information about repurchases or whether the 
current disclosure requirements are sufficient.
---------------------------------------------------------------------------

    \624\ See Item 2(c) of Part II of Form 10-Q and Item 5(c) of 
Form 10-K.
    \625\ For example, exchange listing requirements in Australia 
require disclosure of share repurchases by the next business day. 
See Australian Securities Exchange Listing Rule 3.8A, available at 
https://www.asx.com.au/documents/rules/Chapter03.pdf.
---------------------------------------------------------------------------

c. Request for Comment
    199. Is the information required under Item 703 about repurchases 
of a registrant's equity securities important to investors? If so, are 
there any revisions we could make to Item 703 to improve the disclosure 
provided to investors?
    200. Should we require more granular information on repurchases of 
a registrant's equity securities? If so, what additional detail or more 
granular information should we require? For example, should we require 
disclosure about incurrence of indebtedness to fund repurchases or the 
impact repurchases had on performance measures, such as earnings per 
share or other items? If so, how should this information be formatted 
and presented?
    201. Does Item 703 provide important information that is not also 
disclosed in a registrant's financial statements? Are there benefits to 
investors in providing this information in both the financial 
statements and in non-financial statement disclosure?
    202. Item 703 requires disclosure of all repurchases of registered 
securities and does not have a de minimis requirement. Do investors 
find disclosure of all repurchases of securities during a registrant's 
fiscal quarter important to making a voting or investment decision? 
Should we adopt a general materiality standard or specify a monetary 
threshold for Item 703 disclosure in periodic reports?
    203. Item 703 disclosure is required on a quarterly basis, while 
relevant U.S. GAAP disclosure is required on an annual basis. Should we 
require more frequent Item 703 disclosure? If so, what timeframe for 
reporting repurchases would be appropriate?
    204. Should we require registrants to report repurchases on Form 8-
K? For example, should we require Form 8-K disclosure only of 
repurchases that exceed a certain threshold, similar to Item 3.02 of 
Form 8-K, which requires registrants to disclose sales of equity 
securities that constitute more than one percent of the shares 
outstanding of the class of equity securities? If so, what should this 
threshold be and why?

E. Industry Guides

    The Industry Guides express the disclosure policies and practices 
of the Division and are intended to assist registrants and their 
counsel in preparing disclosure for their filings.\626\ Currently, 
there are five Industry Guides that address disclosures by: (i) Bank 
holding companies,\627\ (ii) oil and gas programs,\628\ (iii) real 
estate limited partnerships,\629\ (iv) property-casualty insurance 
underwriters,\630\ and (v) mining companies.\631\ All five of the 
Industry Guides apply to disclosure in Securities Act registration 
statements. The Industry Guides for bank holding companies, property-
casualty insurance underwriters, and mining companies also apply to 
disclosure in Exchange Act filings.\632\
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    \626\ Although the Commission published the Industry Guides, 
they do not constitute Commission rules and instead are statements 
of staff policy. See Rescission of Guides and Redesignation of 
Industry Guides, Release No. 33-6384 (Mar. 3, 1982) [47 FR 11476 
(Mar. 16, 1982)] (``Industry Guide Release'') (``These guides remain 
as an expression of the policies and practices of the Division of 
Corporation Finance and their status is unaffected by [the listing 
of the Industry Guides in Regulation S-K].'' Id. at 11476).
    \627\ Securities Act and Exchange Act Industry Guide 3--
Statistical Disclosure by Bank Holding Companies. Industry Guide 3 
was first published in 1976 as Securities Act Guide 61 and Exchange 
Act Industry Guide 3. See Guides for Statistical Disclosure by Bank 
Holding Companies, Release No. 33-5735 (Aug. 31, 1976) [41 FR 39007 
(Sept. 14, 1976)]. There have been only minor revisions to the text 
of Industry Guide 3 since its re-designation as an Industry Guide in 
1982. Revisions relating to non-performing loan disclosure 
requirements were implemented in 1983, and revisions relating to 
exposures to borrowers in certain foreign countries were implemented 
in 1986. See Revision of Industry Guide Disclosures for Bank Holding 
Companies, Release No. 33-6478 (Aug. 11, 1983) [48 FR 37609 (Aug. 
19, 1983)]; Amendments to Industry Guide Disclosures by Bank Holding 
Companies, Release No. 33-6677 (Nov. 25, 1986) [51 FR 43594 (Dec. 3, 
1986)].
    \628\ Securities Act Industry Guide 4--Prospectuses Relating to 
Interests in Oil and Gas Programs. Industry Guide 4 was first 
published in 1970 as Guide 55, which was redesignated as Securities 
Act Industry Guide 4 in 1982. See Definitive Guide for the 
Preparation of Prospectuses Relating to Interests in Oil and Gas 
Programs, Release No. 33-5036 (Jan. 19, 1970) [35 FR 1233 (Jan. 30, 
1970)]. While the disclosure requirements for oil and gas producing 
activities were modernized in 2008 (at which time Industry Guide 2 
was eliminated), the changes did not affect Securities Act Industry 
Guide 4. Securities Act Industry Guide 4 is focused on disclosure 
relating to the offering of interests in oil and gas programs, such 
as the terms of the offering, the participation in costs and 
revenues, application of proceeds and risk factors.
    \629\ Securities Act Industry Guide 5--Preparation of 
Registration Statements Relating to Interests in Real Estate Limited 
Partnerships. Industry Guide 5 was originally published in 1976 as 
Guide 60 and redesignated as Securities Act Industry Guide 5 in 
1982. See Preparation of Registration Statements Relating to 
Interests in Real Estate Limited Partnerships, Release No. 33-5692 
(March 17, 1976) [41 FR 17403 (Apr. 26, 1976)]; Industry Guide 
Release. In 1991 the Commission expanded the application of Industry 
Guide 5 to include the preparation of registration statements for 
real estate investment trusts and all other limited partnership 
offerings, as applicable. See Limited Partnership Reorganizations 
and Public Offerings of Limited Partnership Interests, Release No. 
33-6900 (June 17, 1991) [56 FR 28979 (June 25, 1991)].
    \630\ Securities Act Industry Guide 6 and Exchange Act Industry 
Guide 4--Disclosures Concerning Unpaid Claims and Claim Adjustment 
Expenses of Property-Casualty Insurance Underwriters. These Industry 
Guides were first published in 1984 and there have been no 
significant revisions since their adoption. See Rules and Guide for 
Disclosure Concerning Reserves for Unpaid Claims and Claim 
Adjustment Expenses of Property-Casualty Underwriters, Release No. 
33-6559 (Nov. 27, 1984) [49 FR 47594 (Dec. 6, 1984)].
    \631\ Securities Act and Exchange Act Industry Guide 7--
Description of Property by Issuers Engaged or To Be Engaged in 
Significant Mining Operations (``Industry Guide 7''). Industry-
specific disclosure requirements for mining companies were 
previously included in various Securities Act Forms. In 1992, in 
connection with the Commission's small business initiatives that 
rescinded Form S-18, Item 17A of Form S-18 was redesignated as 
Industry Guide 7, so that the industry specific guidance would be 
applicable to all issuers engaged in mining operations, not only to 
small business issuers. See Small Business Initiatives, Release No. 
33-6949 (July 30, 1992) [57 FR 36442 (Aug. 13, 1992)] (``Small 
Business Initiatives Adopting Release''). A rulemaking petition to 
amend Industry Guide 7 was submitted to the Commission in October 
2012. See letter from the Society for Mining, Metallurgy and 
Exploration, Oct. 1, 2012, available at https://www.sec.gov/rules/petitions/2012/petn4-654.pdf.
    \632\ Guidance contained in Exchange Act Industry Guides 3 and 4 
applies to the description of business portion of registration 
statements filed on Form 10; in proxy and information statements 
relating to mergers, consolidations, acquisitions, and similar 
matters (Item 14 of Schedule 14A and Item 1 of Schedule 14C); and in 
reports filed on Forms 10-K. See Item 802 of Regulation S-K [17 CFR 
229.802]. Exchange Act Industry Guide 7 does not specify the 
Exchange Act filings to which the guidance applies.
    In proposing to re-designate the Industry Guides, the Commission 
noted that industry guidelines ``maximize'' the quality of 
disclosure in certain industries. Accordingly, though not 
specifically applicable to Exchange Act filings, Industry Guide 5 
may be useful in determining the type of information that might be 
important in an Exchange Act filing for a real estate program. See 
Proposed Revision of Regulation S-K and Guides for the Preparation 
and Filing of Registration Statements and Reports, Release No. 33-
6276 (Dec. 23, 1980) [46 FR 78 (Jan. 2, 1981)] (``1980 Proposed 
Revision of Regulation S-K'').
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    We are seeking public input on whether the Industry Guides elicit 
disclosure that is important to investment and voting decisions. We are 
interested in commenters' views on

[[Page 23968]]

whether the Industry Guides provide useful guidance for registrants 
that improves disclosure to investors. Additionally, we are seeking 
input on whether the Industry Guides or portions of the Industry Guides 
should be codified in Regulation S-K.\633\
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    \633\ We focus only on the Industry Guides in this section of 
the release. We do not address items of Regulation S-K that contain 
industry-specific disclosure requirements, such as Item 104, which 
requires disclosure about mine safety that is applicable only to 
registrants that operate coal or other mines. Additionally, this 
section focuses on the Industry Guides generally and does not pose 
questions specific to any of the Industry Guides, although we 
welcome comments on specific revisions to any of the Industry 
Guides. As part of the Disclosure Effectiveness Initiative, the 
staff is currently considering recommendations for Industry Guides 3 
and 7. Comment letters received specific to Industry Guides 3 and 7 
are being considered as part of these staff recommendations.
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1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. A few commenters recommended 
general updates to all Industry Guides.\634\ One commenter recommended 
that we consider additional industry-specific disclosure requirements 
and consider whether changes in the economy require additional 
industry-specific disclosure in either or both Regulations S-X and S-
K.\635\ This commenter also stated that the Industry Guides should be 
updated to reflect changes in disclosure requirements within 
Regulations S-X and S-K and stated that the Industry Guides, relative 
to U.S. GAAP and Regulation S-X, could use improvement. One commenter 
suggested that improved Industry Guides could be helpful in highly-
regulated or specialized industries, such as financial institutions and 
banks, mining, oil and gas exploration, and the pharmaceutical 
industry.\636\ This commenter also suggested moving industry-specific 
disclosure requirements currently in Regulation S-K to the relevant 
Industry Guide.\637\ One commenter recommended requiring additional 
disclosure from oil and gas companies about the carbon asset risk to 
such companies.\638\
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    \634\ See, e.g., letters from Rep. Shelley Moore Capito, et al. 
(July 7, 2014); Senators Dean Heller, Mike Crapo and Jon Tester 
(Aug. 13, 2014); Shearman.
    \635\ See CFA Institute (listing the technology and social media 
sectors as examples of industries where industry-specific disclosure 
may be useful).
    \636\ See Shearman (suggesting that new industry guides could 
address issues such as the regulatory environments in which 
industries operate).
    \637\ Id. (citing Item 104--Mine Safety Disclosure as an 
industry-specific disclosure requirement in Regulation S-K that 
could be moved to an Industry Guide).
    \638\ See letter from Ceres (Apr. 17, 2015) (``Ceres'').
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2. Discussion
    Between 1962 and 1992, the Commission published various Guides and 
Industry Guides to assist registrants in preparing and filing 
registration statements and periodic reports and to shorten the comment 
process.\639\ The Guides represented policies and practices followed by 
the Division and were published in response to an increase in the 
number of filings reviewed by the Division and an associated increase 
in the amount of time between the filing and effective dates of a 
registration statement.\640\ The Guides were intended to provide 
uniformity and enhance comparability of disclosure while reducing the 
necessity for staff comment on matters addressed in the Guides.\641\ 
The Guides were modified and expanded over time, in part, to address 
anticipated disclosure issues.\642\
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    \639\ The first Guides were published in 1962. By 1979, there 
were 63 Guides for the preparation and filing of registration 
statements and five Guides for the preparation and filing of 
periodic reports. See 1980 Proposed Revision of Regulation S-K 
(discussing the history of the guides) 1964 Guides; S-K Study at 7, 
footnote 16, and 10, footnote 28.
    \640\ See id. The backlog of filings and inordinate length of 
the pre-effective period was attributed in part to the low-quality 
of first-time filings and inexperience of counsel and accountants. 
See Acceleration of Registration Statements, Release No. 33-4475 
(Apr. 13, 1962) [27 FR 3990 (Apr. 26, 1962)]; 1980 Proposed Revision 
of Regulation S-K.
    \641\ See 1964 Guides (``It is expected that the publication of 
these policies and practices will not only be of assistance to 
registrants, their counsel and accountants in the preparation of 
registration statements, but also that it will relieve the staff of 
the Commission of the necessity for commenting on these matters in 
respect of such statements.'' Id. at 2490); Proposed Guides 
Concerning Prospectuses Relating to a Public Offering of Interests 
in Oil and Gas Programs, Release No. 33-5001 (Aug. 27, 1969) [34 FR 
14125 (Sept. 6, 1969)] (``The guide is designed to accomplish, to 
the extent feasible, uniformity in both the sequence of disclosures 
and their general content. The guide should thus serve to assist 
issuers in preparing registration statements involving oil and gas 
drilling programs and to facilitate the understanding and analysis 
of the program by the investor, enabling him also to compare more 
readily one offering with another.'' Id. at 14125).
    \642\ See 1980 Proposed Revision of Regulation S-K (also citing 
the Commission's investigation of the hot issues securities markets, 
recommendations of the Industrial Issuers Advisory Committee and 
recommendations in the Sommer Report as factors to which the 
expansion and modification of the Guides can be attributed).
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    In connection with the adoption of the integrated disclosure system 
in 1982, the Guides relating to specific industries were re-designated 
as Industry Guides and the titles of the Securities Act Industry Guides 
and Exchange Act Industry Guides were listed in Items 801 and 802 of 
Regulation S-K, respectively.\643\ Although the Industry Guide titles 
are listed in Items 801 and 802 of Regulation S-K, these guides are not 
part of Regulation S-K and are not rules, regulations or statements of 
the Commission.\644\
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    \643\ See Industry Guide Release (rescinding all guides other 
than those which contain industry-specific disclosure); Items 801 
and 802 of Regulation S-K [17 CFR 229.801; 17 CFR 229.802].
    \644\ See Industry Guide Release.
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    In 1996, the Task Force on Disclosure Simplification recommended 
incorporating the Industry Guides into Regulation S-K, based on the 
Task Force's understanding that registrants find the role of the 
Industry Guides within our disclosure regime confusing.\645\ The Task 
Force also recommended eliminating Industry Guide 1 (Disclosure of 
Principal Sources of Electric and Gas Revenues) because the Task Force 
believed that the information required by the Industry Guide was 
provided in response to other disclosure requirements.\646\
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    \645\ See Task Force Report (recommending that the Industry 
Guides be placed intact at the end of Regulation S-K, in the manner 
that industry-specific disclosure requirements are currently placed 
in Regulation S-X). The Task Force also recommended that the 
Commission consider adopting rules applicable to additional 
industries and recommended general modernization of the Industry 
Guides. Id.
    \646\ See Task Force Report. The Task Force stated that the 
disclosure provided by Guide 1 appears to be adequately covered by 
the requirements of Regulation S-K, primarily Items 101 and 303 of 
Regulation S-K.
---------------------------------------------------------------------------

    Although it did not incorporate the Industry Guides into Regulation 
S-K,\647\ the Commission did follow the Task Force's recommendation 
\648\ to eliminate Industry Guide 1 (Disclosure of Principal Sources of 
Electric and Gas Revenues) because the information requested by the 
Industry Guide is covered by other Commission rules, including Items 
101 and 303 of Regulation S-K.\649\ In 2008, the Commission modernized 
the reporting requirements applicable to oil and gas reserves and 
codified the disclosure items formerly in Industry Guide 2 by 
relocating them into Regulation S-K.\650\
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    \647\ In addressing other Task Force recommendations, the 
Commission stated that its action for certain Task Force 
recommendations was not intended to indicate either approval or 
disapproval of any of the remaining recommendations or suggestions 
in the Task Force Report. See Phase One Recommendations of Task 
Force on Disclosure Simplification Release.
    \648\ See Task Force Report.
    \649\ See Phase One Recommendations of Task Force on Disclosure 
Simplification Release.
    \650\ See Oil and Gas Release.
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    The S-K Study recommended reviewing the Industry Guides to evaluate 
whether they continue to elicit useful information that would not 
otherwise be disclosed. The S-K Study also recommended considering 
whether any Industry Guide provisions should

[[Page 23969]]

be codified in Regulation S-K, whether any information is duplicative 
of U.S. GAAP requirements and whether industry-specific disclosure 
requirements should be scaled or transition periods be provided for 
certain classes of registrants.\651\
---------------------------------------------------------------------------

    \651\ See S-K Study at 103.
---------------------------------------------------------------------------

    In proposing the re-designation of the Industry Guides, the 
Commission cited industry guidelines as an example of the limited 
instances where the use of guidelines is appropriate, stating that 
guidelines should pertain only to areas such as industry-specific 
information, where more specific guidance is appropriate yet 
flexibility is necessary to tailor disclosures to particular facts and 
circumstances.\652\ The Commission cited findings of the Sommer Report 
in concluding that the use of industry guidelines minimizes the extent 
to which registrants must comply with inapplicable disclosure 
requirements, maximizes the quality of the disclosure made for 
particular industries, and provides Commission staff with a reference 
for examining filings by particular industries.\653\
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    \652\ See 1980 Proposed Revision of Regulation S-K (stating 
waiver procedures would be necessary if Industry Guides were 
codified as formal regulations to address scenarios in which the 
rule technically applies but where disclosure was neither necessary 
nor appropriate).
    \653\ See id.
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    We are seeking input on whether the Industry Guides continue to 
achieve the benefits cited by the Commission when it re-designated the 
guides in 1980. Today, the Division publicly releases its comment 
letters.\654\ These letters are often analyzed by third parties that 
publish reports about comment trends in an industry.\655\ We believe 
that registrants look to filings in their industry and recently-issued 
staff comment letters to anticipate and proactively address industry-
specific issues.
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    \654\ See Commission Staff to Begin Publicly Releasing Comment 
Letters and Responses, May 9, 2005, available at https://www.sec.gov/news/press/2005-72.htm.
    \655\ See, e.g., PricewaterhouseCoopers LLP, SEC Comment Letter 
Trends, available at https://www.pwc.com/us/en/cfodirect/publications/sec-comment-letter-trends.html.
---------------------------------------------------------------------------

    We also are seeking public input on the advantages and 
disadvantages of codifying industry-specific disclosure requirements in 
Regulation S-K. Codifying the Industry Guides in Regulation S-K would 
be consistent with the approach taken by the Commission in 2008 when 
former Industry Guide 2 was codified as Subpart 1200 of Regulation S-
K.\656\ This approach could help provide consistency in the disclosure 
provided by registrants in certain industries by making such disclosure 
a regulatory requirement. A potential disadvantage of this approach, 
however, is that over time registrants may be required to provide 
industry-specific disclosure that has become obsolete due to changes in 
industry practices or technology. Codifying the Industry Guides may 
afford registrants less flexibility in determining the industry-
specific disclosures that are most applicable to them.
---------------------------------------------------------------------------

    \656\ See Oil and Gas Release.
---------------------------------------------------------------------------

    Another possible approach is to update but not codify the Industry 
Guides in Regulation S-K. While this approach may allow registrants the 
flexibility to omit obsolete disclosures, the fact that the guidance is 
not a regulatory requirement may result in less uniformity in 
compliance and therefore less comparability across an industry.
3. Request for Comment
    205. Do the Industry Guides result in disclosure that is important 
to investors that registrants might not otherwise disclose under 
Regulation S-K or Regulation S-X? If so, what are examples of this type 
of disclosure?
    206. Do registrants find the Industry Guides useful in preparing 
disclosure for periodic reports?
    207. To the extent that the Industry Guides call for information 
that registrants would not otherwise disclose but for the Industry 
Guides, what are the challenges of providing this disclosure?
    208. Should we include additional industry-specific disclosure 
requirements in Regulation S-K by codifying all or portions of the 
Industry Guides? What are the advantages and disadvantages of including 
industry-specific disclosure requirements in Regulation S-K versus 
retaining the Industry Guides?
    209. Should some or all of the Industry Guides be updated? If so, 
which ones? Should additional Industry Guides or industry-specific 
rules for other industries be developed? If so, which industries would 
benefit from such guidance? Should industry-specific disclosure in 
Regulation S-K or staff guidance be limited to certain industries? If 
so, what criteria should be used to identify those industries?
    210. What additional costs or costs savings, including the 
administrative and compliance costs of preparing and disseminating 
disclosure, do registrants experience because of the Industry Guides? 
Would registrants' disclosure costs be higher, lower or the same if the 
disclosures currently detailed in Industry Guides were incorporated 
into Regulation S-K or Regulation S-X? Please provide quantitative 
estimates if possible.
    211. The Industry Guides originally were intended to assist 
registrants, their counsel and accountants in the preparation of 
disclosure by publishing staff policies and practices related to staff 
review of registrant filings.\657\ Does the public release of the 
staff's comment letters and increased availability of tools that 
aggregate information about disclosure included in Commission filings 
and comment letters reduce the need for the Industry Guides as guidance 
for registrants?
---------------------------------------------------------------------------

    \657\ See 1964 Guides.
---------------------------------------------------------------------------

    212. Does the status of the Industry Guides as staff policy rather 
than Commission rules have any impact on the extent to which 
registrants provide disclosure consistent with the Industry Guides?
    213. Regulations S-K and S-X include some industry specific 
disclosures. For example, Form S-11 \658\ and Schedules III and IV 
prescribed by Articles 12-28 and 12-29 of Regulation S-X, respectively, 
include industry specific disclosure requirements for certain real 
estate companies. If we update and codify the Industry Guides in 
Regulation S-K, should we also move and consolidate other industry-
specific disclosure requirements currently located elsewhere to 
Regulation S-K at the same time? If so, how should we identify those 
disclosure requirements? Are any of these other industry-specific 
disclosure requirements already substantially addressed by non-
industry-specific required disclosures either in Regulation S-K or by 
U.S. GAAP?
---------------------------------------------------------------------------

    \658\ 17 CFR 239.18.
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    214. Should industry-specific disclosure requirements apply to 
every registrant in a particular industry or should they be limited to 
certain categories of registrants? If they should be limited, to which 
registrants should they apply?
    215. What types of investors or audiences are most likely to value 
the information that registrants would not disclose but for the 
Industry Guides?

F. Disclosure of Information Relating to Public Policy and 
Sustainability Matters

    In recent years, Congress has mandated new disclosure requirements 
that address specific public policy concerns. For example, Section 1502 
of the Dodd-Frank Act mandated that the Commission adopt rules 
regarding registrants' use of ``conflict minerals'' originating in 
specified countries, and Section 1504 of the Dodd-Frank Act

[[Page 23970]]

directed the Commission to adopt rules regarding the disclosure of 
payments made by resource extraction issuers to foreign governments or 
the federal government for the purpose of the commercial development of 
oil, natural gas, or minerals.\659\ In addition, Section 1503 of the 
Dodd-Frank Act requires certain registrants to disclose information 
about health and safety violations at mining-related facilities.\660\
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    \659\ 15 U.S.C. 78m(p) and 15 U.S.C. 78m(q)(2)(A). The 
Commission adopted Exchange Act Rule 13p-1 and Form SD to implement 
Section 1502 and proposed Rule 13q-1 and an amendment to Form SD to 
implement Section 1504. Rule 13q-1 was initially adopted by the 
Commission on August 22, 2012, but it was subsequently vacated by 
the U.S. District Court for the District of Columbia. See Conflict 
Minerals, Release No. 34-67716 (Aug. 22, 2012) [77 FR 56274 (Sept. 
12, 2012)] and Disclosure of Payments by Resource Extraction 
Issuers, Release No. 34-76620 (Dec. 11, 2015) [80 FR 80057 (Dec. 23, 
2015)]. See Section III.A.1 for a discussion of the Commission's 
statutory mandates.
    \660\ 15 U.S.C. 78m-2. Pursuant to authority granted in Section 
1503(d) of the Dodd-Frank Act, the Commission adopted Item 104 of 
Regulation S-K to implement the statute. See Item 104 of Regulation 
S-K [17 CFR 229.104]. See also Mine Safety Disclosure Release.
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    Some investors and interest groups also have expressed a desire for 
greater disclosure of a variety of public policy and sustainability 
matters, stating that these matters are of increasing significance to 
voting and investment decisions.\661\ For example, some have urged the 
Commission to adopt disclosure requirements on political spending.\662\ 
The Commission, however, has determined in the past that disclosure 
relating to environmental and other matters of social concern should 
not be required of all registrants unless appropriate to further a 
specific congressional mandate or unless, under the particular facts 
and circumstances, such matters are material.\663\
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    \661\ See, e.g., Ernst & Young LLP, Tomorrow's Investment Rules 
2.0, 2015 (``Tomorrow's Investment Rules 2015''), at 19, available 
at https://www.ey.com/Publication/vwLUAssets/EY-tomorrows-investment-
rules-2/$FILE/EY-tomorrows-investment-rules-2.0.pdf (stating that, 
in a survey of more than 200 institutional investors around the 
world, ``. . . almost two-thirds of respondents say companies do not 
adequately disclose information about ESG risks, and nearly 40% call 
for companies to do so more fully in the future.''); Mark Carney, 
Breaking the Tragedy of the Horizon--Climate Change and Financial 
Stability, Speech given at Lloyd's of London, Sept. 29, 2015, 
available at https://www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx (stating that a new disclosure ``framework 
for firms to publish information about their climate change 
footprint, and how they manage their risks and prepare (or not) for 
a 2 degree world, could encourage a virtuous circle of analyst 
demand and greater use by investors in their decision making''); 
Gibson Dunn, Shareholder Proposal Developments During the 2015 Proxy 
Season, July 15, 2015 (stating that the most common 2015 shareholder 
proposal topics, along with the approximate number of proposals 
submitted were: Political and lobbying activities (110 proposals); 
proxy access (108 proposals); and independent chair (76 proposals)).
    \662\ See Petition for Rulemaking from the Committee on 
Disclosure of Corporate Political Spending, Aug. 3, 2011, available 
at https://www.sec.gov/rules/petitions/2011/petn4-637.pdf. The 
Consolidated Appropriations Act of 2016 prohibits the Commission 
from using appropriated funds to ``finalize, issue, or implement any 
rule, regulation, or order regarding the disclosure of political 
contributions, contributions to tax exempt organizations, or dues 
paid to trade associations.'' Public Law 114-113, Sec. 707, 129 
Stat. 2242 (2015) (requirement in Division O, Title VII). This 
appropriations limitation applies with respect to the Commission's 
current fiscal year.
    \663\ See Environmental and Social Disclosure, Release No. 33-
5627 (Oct. 14, 1975) [40 FR 51656 (Nov. 6, 1975)] (``1975 
Environmental Disclosure Release''). In this release, the Commission 
concluded that, although it is generally not authorized to consider 
the promotion of social goals unrelated to the objectives of the 
federal securities laws, it is authorized and required by NEPA to 
consider promotion of environmental protection as a factor in 
exercising its rulemaking authority. See also infra note 687 and 
accompanying text.
---------------------------------------------------------------------------

    We are interested in receiving feedback on the importance of 
sustainability and public policy matters to informed investment and 
voting decisions. In particular, we seek feedback on which, if any, 
sustainability and public policy disclosures are important to an 
understanding of a registrant's business and financial condition and 
whether there are other considerations that make these disclosures 
important to investment and voting decisions. We also seek feedback on 
the potential challenges and costs associated with compiling and 
disclosing this information.
1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness. We received a number of comment letters 
on a variety of sustainability and public policy matters, including 
climate change.\664\ Sustainability disclosure encompasses a range of 
topics, including climate change, resource scarcity, corporate social 
responsibility, and good corporate citizenship.\665\ These topics often 
are characterized broadly as environmental, social, or governance 
(``ESG'') concerns.\666\ Many commenters noted a growing interest in 
ESG disclosure among investors \667\ and many recommended increased 
sustainability disclosure requirements.\668\ Some commenters criticized 
the primarily voluntary nature of current corporate sustainability 
reporting and stated their belief that information made available to 
investors is inconsistent and incomplete.\669\ Many commenters also 
sought disclosure of sustainability related risks, and some of these 
commenters sought related MD&A and trend disclosure.\670\
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    \664\ See, e.g., letters from Union of Concerned Scientists (May 
5, 2015) (``UCS''); Ceres; Business Roundtable; Global Reporting 
Initiative (Apr. 14, 2015) (``GRI''); Carbon Tracker Initiative 
(Feb. 13, 2015) (``CTI''); Investor Environmental Health Network 
(Feb. 11, 2015) (``IEHN''); Wallace Global Fund (Dec. 1, 2014) 
(``Wallace Global Fund''); CFA Institute; SASB; Harrington 
Investments (Oct. 15, 2014) (``Harrington Investments''); Interfaith 
Center on Corporate Responsibility (Sept. 24, 2014) (``ICCR''); 
SCSGP; Sustainability Group (Aug. 12, 2014) (``Sustainability 
Group''); Corporate Reform Coalition (July 2, 2014) (``Corporate 
Reform Coalition''); First Affirmative Financial Network (June 26, 
2014) (``First Affirmative Financial Network''); US SIF 1; Allianz.
    \665\ See, PricewaterhouseCoopers LLP, Sustainability goes 
mainstream: Insights into investor views, May 2014, available at 
https://www.pwc.com/us/en/governance-insights-center/publications/sustainability-goes-mainstream-investor-views.html. See also, e.g., 
World Federation of Exchanges, Exchange Guidance and 
Recommendation--October 2015, Oct. 2015, (``WFE Guidance'') 
available at https://www.world-exchanges.org/home/index.php/news/world-exchange-news/world-exchanges-agree-enhanced-sustainability-guidance.
    \666\ See, e.g., WFE Guidance.
    \667\ See, e.g., US SIF 1 (citing an increase in assets under 
management by signatories to the Principles for Responsible 
Investment and the number of institutional investors urging 
companies to disclose greenhouse gas goals and plans to reduce 
emissions); Ceres (noting that a ``growing number of investors are 
working to integrate climate risk into their investment strategies . 
. . .''); CFA Institute (noting ``[a] small, albeit growing, 
constituency of investors has advocated for the inclusion of 
sustainability information/disclosures'').
    \668\ See, e.g., UCS; Ceres; GRI; CTI; IEHN; Wallace Global 
Fund; Harrington Investments; ICCR; Sustainability Group (concerned 
with underreporting of material information related to environmental 
liabilities); US SIF 1; First Affirmative Financial Network Group; 
Allianz.
    \669\ See, e.g., US SIF 1; Corporate Reform Coalition; letter 
from Warren G. Lavey, (Nov. 4, 2015).
    \670\ See, e.g., UCS; Ceres (requesting staff scrutiny of and 
comment on filings made by oil and gas companies on carbon asset 
risks, stating such risks constitute ``known trends''); CTI (noting 
that ``the relevant `trend' is how the increasing threat of 
unmanageable warming will exert pressure to curb emissions from 
fossil fuel consumption,'' with potential disclosure impacts 
throughout MD&A, including capital expenditure plans and reserve 
valuations, and seeking quantitative disclosures when reasonably 
available); IEHN (recommending enhanced trend disclosure of emerging 
scientific literature that is both relevant to a company's products 
and activities and indicative of potential for substantial health or 
environmental risks, in addition to disclosure of: (i) Potential 
long-term impact, (ii) the scope of potential exposure, (iii) 
measures the company is taking to reduce or mitigate these risks, 
and (iv) relevant benchmarks of liability); ICCR (supportive of risk 
related requirements relating to climate change); US SIF 1 
(affirming its 2009 recommendation to require annual disclosure on a 
comprehensive set of sustainability indicators (both universal and 
industry-specific) and seeking interpretive guidance to clarify that 
short and long-term sustainability risk disclosure is appropriate in 
MD&A).
---------------------------------------------------------------------------

    One commenter opposed mandatory disclosure of sustainability 
risks,\671\ while another opposed disclosure requirements that it 
described as

[[Page 23971]]

addressing ``societal issues unrelated to investor protection'' in 
periodic filings.\672\ One of these commenters acknowledged the 
importance of sustainability information to a variety of stakeholders 
but opined that these issues ``are not typically material to an 
understanding of the company's financial performance'' and therefore 
are not appropriate for inclusion in Exchange Act reports.\673\ The 
other commenter raised similar materiality concerns, stating that 
``some groups are seeking to use the federal securities laws to address 
various societal concerns, without giving effect to the bedrock 
materiality principle.'' \674\
---------------------------------------------------------------------------

    \671\ See SCSGP (stating that sustainability disclosure can be 
effectively communicated outside of SEC filings).
    \672\ See Business Roundtable (suggesting that Commission 
guidance about when disclosure might be warranted in this area would 
be more appropriate than expanding the disclosure requirements).
    \673\ See SCSGP (also noting that when these issues are material 
to a registrant's financial performance, registrants generally 
provide disclosure under existing Commission requirements).
    \674\ See Business Roundtable.
---------------------------------------------------------------------------

    We received several comment letters that specifically mentioned 
climate change disclosure.\675\ Many of these commenters expressed 
concern that disclosures made in response to the Commission's current 
rules do not adequately address the risks associated with climate 
change.\676\ Some commenters cited specific risks that they believe are 
not adequately disclosed, such as stranded assets and regulatory 
risk.\677\ Other commenters referenced the Commission's 2010 
Interpretive Guidance on Climate Change and stated that registrants are 
not following that guidance.\678\
---------------------------------------------------------------------------

    \675\ See, e.g., First Affirmative Financial Network; US SIF 1; 
ICCR; SASB; Wallace Global Fund; letter from US SIF and US SIF 
Foundation (Dec. 19, 2014) (``US SIF 2''); CTI; GRI; Ceres; UCS; 
Allianz.
    \676\ See, e.g., First Affirmative Financial Network; Wallace 
Global Fund; Ceres; UCS.
    \677\ See, e.g., Wallace Global Fund (stating that failure to 
disclose ``stranded assets,'' which are fossil fuel assets that must 
stay in the ground because of caps imposed by treaty, law or 
regulation, may result in a material misrepresentation of a 
corporation's balance sheet); Ceres (noting an absence of disclosure 
regarding material risks to the oil and gas industry due to 
increased capital expenditures on high-cost projects, regulatory 
risk, and carbon asset risk); UCS.
    \678\ See, e.g., First Affirmative Financial Network; SASB; US 
SIF 1.
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    A few commenters suggested that we adopt new line-item disclosure 
requirements for climate change matters.\679\ One suggested that we 
adopt a requirement to disclose anticipated full-cycle costs of future 
capital expenditures and a requirement to disclose the carbon content 
of a registrant's reserves and resources.\680\ Another suggested that 
we require oil and gas companies to disclose carbon costs alongside the 
company's disclosure of proved reserves.\681\ A third commenter 
suggested a rule that requires an annual reporting of the risks to the 
registrant of the effects of climate change, if any.\682\ We also 
received many letters recommending the Commission adopt a rule 
requiring disclosure of political spending.\683\
---------------------------------------------------------------------------

    \679\ See, e.g., US SIF 1; CTI; Allianz; UCS.
    \680\ See CTI.
    \681\ See Allianz.
    \682\ See UCS.
    \683\ See, e.g., Form Letter Type A; UCS; Ceres; Daniel A. 
Simon, et al. (Apr. 21, 2015); Business Roundtable; GRI; CTI; IEHN; 
Wallace Global Fund; CFA Institute; SASB; Harrington Investments; 
ICCR; SCSGP; Sustainability Group; Agenda Project Action Fund; 
Corporate Reform Coalition; First Affirmative Financial Network; US 
SIF 1; Allianz.
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2. Discussion
    In 1975, the Commission considered a variety of ``environmental and 
social'' disclosure matters, as well as its own authority and 
responsibilities to require disclosure under the federal securities 
laws.\684\ Following extensive proceedings on these topics, the 
Commission concluded that it generally is not authorized to consider 
the promotion of goals unrelated to the objectives of the federal 
securities laws when promulgating disclosure requirements, although 
such considerations would be appropriate to further a specific 
congressional mandate.\685\ The Commission also noted that disclosure 
to serve the needs of limited segments of the investing public, even if 
otherwise desirable, may be inappropriate, because the cost to 
registrants, which must ultimately be borne by their shareholders, 
would likely outweigh the resulting benefits to most investors.\686\
---------------------------------------------------------------------------

    \684\ See 1975 Environmental Disclosure Release, supra, note 
663. The Commission instituted public proceedings in response to a 
court order that required the Commission to ``undertake further 
rulemaking action to bring the Commission's corporate disclosure 
regulations into full compliance with the letter and spirit of 
NEPA'' and to ``provide a statement of reasons for the denial of the 
equal employment portion of Plaintiff's Rulemaking Petition.'' Id. 
at 51657. The order relates to plaintiffs' 1971 rulemaking petition 
in which the plaintiffs made specific proposals for new disclosure 
requirements pertaining to the environment and disclosure about the 
employment of minorities and women. Regarding the equal employment 
portion of the petition, the plaintiffs sought to require that the 
Commission require registrants to provide disclosure of statistics 
on equal employment practices. The court found that the Commission's 
denial of this portion of the plaintiffs' rulemaking petition failed 
to comply with the Administrative Procedures Act. See Natural 
Resources Defense Council.
    \685\ See id. See also, supra, note 61. The Commission was 
ordered to resolve two overriding factual issues as part of the 
proceeding, ``the extent of `ethical investor' interest in the type 
of information which Plaintiffs have requested'' and ``what avenues 
of action are available which ethical investors may pursue and which 
will tend to eliminate corporate practices that are inimical to the 
environment and equal employment opportunity.'' See Natural 
Resources Defense Council at 701.
    \686\ See 1975 Environmental Disclosure Release at 51666. See 
also id. at note 26 (``If the Commission were required to promulgate 
rules by plebiscite at the behest of any member of the public, its 
functions would be purely ministerial, a result clearly not intended 
by Congress . . . '').
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    In 1975, the Commission also concluded that it would require 
disclosure relating to social and environmental performance ``only if 
such information . . . is important to the reasonable investor--
material information.'' \687\ While the Commission concluded that its 
proceedings did not support a specific requirement for all registrants 
to disclose information describing ``corporate social practices,'' the 
Commission noted that in specific cases, some information of this type 
might be necessary in order to make the statements in a filing not 
misleading or otherwise complete.\688\
---------------------------------------------------------------------------

    \687\ See id. at 51660. The Commission's conclusions in the 1975 
proceedings were endorsed by the Sommer Report. The Sommer Report 
recommended that the Commission ``should require disclosure of 
matters of social and environmental significance only when the 
information in question is material to informed investment or 
corporate suffrage decision-making or required by laws other than 
the securities laws.'' Id. at 395. The Sommer Report further 
expressed the view that the Commission should classify social and 
environmental information as material ``only when it reflects 
significantly on the economic and financial performance of the 
Company.'' Id. at 326-327. However, the Sommer Report noted that a 
minority of the Advisory Committee on Corporate Disclosure believed 
that disclosure of social and environmental information is material 
to an investment decision regardless of its economic impact on the 
financial performance of the company. The minority argued that this 
kind of information reflects on the quality and character of 
management, which ``clearly plays an important role in both 
investment and corporate suffrage decision-making,'' and urged the 
Commission to require increased disclosure in the social and 
environmental area. Id. at 397.
    \688\ See id. at 51656; Exchange Act Rule 12b-20 [17 CFR 
240.12b-20].
---------------------------------------------------------------------------

    The current statutory framework for adopting disclosure 
requirements remains generally consistent with the framework that the 
Commission considered in 1975.\689\ However, the Commission has 
recognized that the task of identifying what information is material to 
an investment and voting decision is a continuing one in the field of 
securities regulation.\690\ The role of sustainability and public 
policy information in investors' voting and

[[Page 23972]]

investment decisions may be evolving as some investors are increasingly 
engaging on certain ESG matters.\691\ According to one study, investors 
are more likely to engage registrants on sustainability issues than on 
financial results or transactions and corporate strategy.\692\ One 
observer expressed the view that ESG is not only a public policy issue 
but also a financial issue, noting a positive correlation between a 
``strong ESG record'' and excellence in operations and management.\693\ 
Moreover, this observer specifically noted that regulatory risks posed 
by climate change are investment issues.\694\ Recent studies have also 
found that asset managers increasingly incorporate or have committed to 
incorporating ESG considerations into their financial analyses.\695\
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    \689\ Since 1996, the Commission also has been statutorily 
required to consider, in addition to the protection of investors, 
whether an action will promote efficiency, competition, and capital 
formation. See Section 2(b) of the Securities Act [15 U.S.C. 
77b(b)]; Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)]. See 
also Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)].
    \690\ See 1980 Proposed Revisions.
    \691\ See Bill Libit and Todd Freier, The Corporate Social 
Responsibility Report and Effective Stakeholder Engagement, Harvard 
Law School Forum on Corporate Governance and Financial Regulation, 
Dec. 28, 2013, available at https://corpgov.law.harvard.edu/2013/12/28/the-corporate-social-responsibility-report-and-effective-stakeholder-engagement (discussing increasing stakeholder engagement 
on ESG issues); Matteo Tonello, Global Trends in Board-Shareholder 
Engagement, Harvard Law School Forum on Corporate Governance and 
Financial Regulation, Oct. 25, 2013, available at https://corpgov.law.harvard.edu/2013/10/25/global-trends-in-board-shareholder-engagement (describing representative shareholder 
engagement examples that ``indicate that much engagement activity 
involves executive compensation practices, corporate governance 
structure, and environmental and social issues'').
    \692\ See Institutional Shareholder Services for the Investor 
Responsibility Research Center Institute, Defining Engagement: An 
Update on the Evolving Relationship Between Shareholders, Directors 
and Executives, Apr. 10, 2014, (stating this trend in engagement 
``may reflect that investors are satisfied with existing levels of 
disclosure on financials and strategy, and do not feel a need to 
engage further; or it may reflect that some of the survey 
respondents were corporate governance and proxy voting specialists, 
who are more likely to engage on governance or environmental and 
social matters than on financial matters.''). See also supra note 
691.
    \693\ See BlackRock Investment Institute, The Price of Climate 
Change, Oct. 2015, at 7, available at https://www.blackrock.com/corporate/en-us/literature/whitepaper/bii-pricing-climate-risk-us.pdf (indicating that ``ESG factors cannot be divorced from 
financial analysis. We view a strong ESG record as a mark of 
operational and management excellence. Companies that score high on 
ESG measures tend to quickly adapt to changing environmental and 
social trends, use resources efficiently, have engaged (and, 
therefore, productive) employees, and face lower risks of regulatory 
fines or reputational damage.'').
    \694\ Id. at 2 (indicating that ``[c]limate change risk has 
arrived as an investment issue. Governments are setting targets to 
curb greenhouse gas emissions. This may pave the way for policy 
shifts that we could see ripple across industries. The resulting 
regulatory risks are becoming key drivers of investment returns.'')
    \695\ See US SIF Foundation, Unlocking ESG Integration, Sept. 
2015, at 7, available at https://www.ussif.org/files/Publications/UnlockingESGIntegration.pdf, (stating that inclusion of ESG criteria 
in the financial analysis of surveyed asset managers increased over 
three times in terms of U.S.-domiciled assets managed (from about 
$1.4 trillion to about $4.8 trillion) over a two-year period).
    See also, UNEP Finance Initiative, United Nations Principles for 
Responsible Investment Report on Progress 2015, available at https://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Report-on-Progress_2015.pdf (stating that approximately 1,000 
financial firms with aggregate assets under management of 
approximately $59 trillion had signed on to the U.N.'s six 
Principles for Responsible Investment (PRI) as of 2015. Among other 
things, the signatories to the PRI committed to incorporate ESG 
issues into their investment analyses and decision making processes, 
be active owners around these issues, seek appropriate disclosure on 
ESG issues by companies in which they invest, and collaborate to 
promulgate the PRI broadly and enhance implementation, while 
reporting on their own activities).
---------------------------------------------------------------------------

    In seeking public input on sustainability and public policy 
disclosures, we recognize that some registrants historically have not 
considered this information material. Some observers continue to share 
this view and have expressed concern that sustainability or policy-
driven disclosure requirements do not always result in disclosure that 
a reasonable investor would consider material.\696\ Some have expressed 
concerns that policy-driven disclosure requirements represent a shift 
away from the Commission's mission to protect investors, maintain fair, 
orderly, and efficient markets, and facilitate capital formation, and 
that such requirements could risk burdening both registrants and 
investors with costly disclosure that is not material to any investment 
or voting decision.\697\ Similarly, concerns have been expressed that 
adopting sustainability or policy-driven disclosure requirements may 
have the goal of altering corporate behavior, rather than producing 
information that is important to voting and investment decisions.\698\ 
Additionally, one observer has noted numerous attempts to use the 
Commission's regulatory apparatus to address societal issues.\699\ As 
the costs of compiling and disclosing information about sustainability 
and public policy issues are borne by the registrant, and ultimately 
its shareholders, as is all disclosure, we are seeking input on whether 
these disclosures are important to investors' voting and investment 
decisions.
---------------------------------------------------------------------------

    \696\ See David M. Lynn, The Dodd-Frank Act's Specialized 
Corporate Disclosure: Using the Securities Laws to Address Public 
Policy Issues, 6 J. Bus. & Tech. L. 327 (Spring 2011) (``Lynn''); 
Business Roundtable; SCSGP.
    \697\ See, e.g., Business Roundtable; Lynn.
    \698\ See generally, Cynthia A. Williams, The Securities and 
Exchange Commission and Corporate Social Transparency, 112 Harv. L. 
Rev. 1197 at 1297 (Apr. 1999) (describing what the author refers to 
as the ``Corporate Management Constraint,'' which is an argument 
against requiring social disclosure, particularly social disclosure 
with the explicit or implicit purpose of changing the way 
registrants are managed, because the Commission has no authority to 
do so); Lynn; Business Roundtable.
    \699\ See Matt Levine, Climate Change and Sovereign Debt, 
Bloomberg View (Jan. 25, 2016).
---------------------------------------------------------------------------

3. Request for Comment
    216. Are there specific sustainability or public policy issues are 
important to informed voting and investment decisions? If so, what are 
they? If we were to adopt specific disclosure requirements involving 
sustainability or public policy issues, how could our rules elicit 
meaningful disclosure on such issues? How could we create a disclosure 
framework that would be flexible enough to address such issues as they 
evolve over time? Alternatively, what additional Commission or staff 
guidance, if any, would be necessary to elicit meaningful disclosure on 
such issues?
    217. Would line-item requirements for disclosure about 
sustainability or public policy issues cause registrants to disclose 
information that is not material to investors? Would these disclosures 
obscure information that is important to an understanding of a 
registrant's business and financial condition? Why or why not?
    218. Some registrants already provide information about ESG matters 
in sustainability or corporate social responsibility reports or on 
their Web sites.\700\ Corporate sustainability reports may also be 
available in databases aggregating such reports.\701\ Why do some 
registrants choose to provide sustainability information outside of 
their Commission filings? Is the information provided on company Web 
sites sufficient to address investor needs? What are the advantages and 
disadvantages of registrants providing

[[Page 23973]]

such disclosure on their Web sites? How important to investors is 
integrated reporting,\702\ as opposed to separate financial and 
sustainability reporting? If we permitted registrants to use 
information on their Web sites to satisfy any ESG disclosure 
requirement, how would this affect the comparability and consistency of 
the disclosure?
---------------------------------------------------------------------------

    \700\ See, e.g., Center for Political Accountability and Zicklin 
Center for Business Ethics at the Wharton School of the University 
of Pennsylvania, The 2015 CPA-Zicklin Index of Corporate Political 
Disclosure and Accountability, Oct. 8, 2015 at 8, available at 
https://files.politicalaccountability.net/index/CPA-Zicklin_Index_Final_with_links.pdf; KPMG LLP, Currents of Change: 
The KPMG Survey of Corporate Responsibility Reporting 2015, Nov. 24, 
2015 (``2015 KPMG''), available at https://assets.kpmg.com/content/dam/kpmg/pdf/2016/02/kpmg-international-survey-of-corporate-responsibility-reporting-2015.pdf; Governance & Accountability 
Institute, Sustainability--what matters?, 2014, available at https://www.ga-institute.com/fileadmin/user_upload/Reports/G_A_sustainability_-_what_matters_-FULL_REPORT.pdf.
    \701\ See, e.g., CorporateRegister.com for a database of 
corporate responsibility reports from over 900 companies in the 
United States and about 8,100 companies internationally, available 
at https://www.corporateregister.com; Sustainability Disclosure 
Database of the Global Reporting Initiative available at https://database.globalreporting.org.
    \702\ See International Integrated Reporting Council, The 
International IR Framework, Dec. 2013, available at https://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf; Robert G. Eccles and George 
Serafeim, Corporate and Integrated Reporting: A Functional 
Perspective (Harvard Business School, Working Paper 14-094 May 5, 
2014).
---------------------------------------------------------------------------

    219. In an effort to coordinate ESG disclosures, several 
organizations have published or are working on sustainability reporting 
frameworks.\703\ Currently, some registrants use these frameworks and 
provide voluntary ESG disclosures.\704\ If we propose line-item 
disclosure requirements on sustainability or public policy issues, 
which, if any, of these frameworks should we consider in developing any 
additional disclosure requirements?
---------------------------------------------------------------------------

    \703\ See WFE Guidance at 8 (describing sustainability reporting 
frameworks established by CDP (formerly, the Carbon Disclosure 
Project), Global Reporting Initiative, the International Integrated 
Reporting Council, SASB, and the United Nations Global Compact).
    \704\ For example, according to an industry study, about seventy 
percent of corporate responsibility reporting in the Americas uses 
the Global Reporting Initiative reporting framework. See 2015 KPMG 
at 42.
---------------------------------------------------------------------------

    220. Are there sustainability or public policy issues for which 
line-item disclosure requirements would be consistent with the 
Commission's rulemaking authority and our mission to protect investors, 
maintain fair, orderly and efficient markets and facilitate capital 
formation, as described in Section III.A.1 of this release? If so, how 
could we address the evolving nature of such issues and keep our 
disclosure requirements current?
    221. What, if any, challenges would registrants face in preparing 
and providing this information? What would be the additional costs of 
complying with sustainability or public policy line-item disclosure 
requirements, including the administrative and compliance costs of 
preparing and disseminating disclosures, beyond the costs associated 
with current levels of disclosure? Please quantify costs and expected 
changes in costs where possible.
    222. If we propose line-item disclosure requirements that require 
disclosure about sustainability or public policy issues, should we 
scale the disclosure requirements for SRCs or some other category of 
registrant? Similarly, should we exempt SRCs or some other category of 
issuer from any such requirements?
    223. In 2010, the Commission published an interpretive release to 
assist registrants in applying existing disclosure requirements to 
climate change matters. As part of the Disclosure Effectiveness 
Initiative, we received a number of comment letters suggesting that 
current climate change-related disclosures are insufficient. Are 
existing disclosure requirements adequate to elicit the information 
that would permit investors to evaluate material climate change risk? 
Why or why not? If not, what additional disclosure requirements or 
guidance would be appropriate to elicit that information?

G. Exhibits

    Exhibits to Commission filings provide detailed information about 
the registrant that generally is not available in the form itself. Item 
601 of Regulation S-K specifies, by form type, the exhibits that 
registrants must file with Securities Act and Exchange Act forms. The 
exhibit requirements for Exchange Act forms overlap with many--but not 
all--of the exhibit requirements for Securities Act forms. Similarly, 
although there are some differences between the exhibit requirements 
for Forms 8-K, 10-Q and 10-K, many of the required exhibits are the 
same. Exhibits required in Exchange Act reports cover such categories 
as certain transactions,\705\ corporate organization and 
governance,\706\ rights of securities holders,\707\ matters relating to 
the financial statements (including certifications),\708\ and material 
contracts.\709\
---------------------------------------------------------------------------

    \705\ E.g., Item 601(b)(2) of Regulation S-K (plan of 
acquisition, reorganization, arrangement, liquidation or succession) 
[17 CFR 229.601(b)(2)].
    \706\ E.g., Items 601(b)(3)(i)-(ii) (articles of incorporation, 
bylaws); (b)(14) (code of ethics); (b)(20) (documents or statements 
to security holders); (b)(21) (subsidiaries of the registrant); 
(b)(22) (published report regarding matters submitted to vote of 
security holders); (b)(24) (power of attorney); (b)(31) (Exchange 
Act Rule 13a-14(a)/15d-14(a) certifications) and (b)(32) (Exchange 
Act Section 1350 certifications) of Regulation S-K [17 CFR 
229.601(b)(3)(i)-(ii), (b)(14), (b)(20), (b)(21), (b)(22), (b)(24), 
(b)(31) and (b)(32)].
    \707\ E.g., Items 601(b)(4) (instruments defining the rights of 
security holders) and (b)(9) (voting trust agreement) of Regulation 
S-K [17 CFR 229.601(b)(4) and (9)].
    \708\ E.g., Items 601(b)(15) (letter re unaudited interim 
financial information); (b)(16) (change in certifying accountant); 
(b)(18) (change in accounting principles); (b)(31) (Exchange Act 
Rule 13a-14(a)/15d-14(a) certifications) and (b)(32) (Exchange Act 
Section 1350 certifications) of Regulation S-K [17 CFR 
229.601(b)(15), (b)(16), (b)(18), (b)(31) and (b)(32)].
    \709\ Item 601(b)(10) (material contracts) of Regulation S-K [17 
CFR 229.601(b)(10)].
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    The requirement to file exhibits originated in Schedule A of the 
Securities Act, which requires registrants to file copies of certain 
agreements, opinions and governing instruments.\710\ Over time, the 
Commission has adopted additional requirements for exhibits as part of 
different forms under the Securities Act and the Exchange Act.\711\ In 
1980, the Commission standardized and centralized the exhibit 
requirements by moving them from individual forms to Item 601 in 
Regulation S-K.\712\ The exhibit requirements adopted in 1980 remain 
substantially the same today.\713\ In 2003, however, the Commission 
adopted additional exhibit requirements mandated by the Sarbanes-Oxley 
Act.\714\

[[Page 23974]]

In 2009, the Commission adopted rules to require filing of interactive 
data-tagged financial statements as part of its 21st Century Disclosure 
Initiative.\715\ More recently, the Commission adopted additional 
exhibit requirements mandated by the Dodd-Frank Act.\716\
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    \710\ See Securities Act of 1933 Schedule A Paragraphs (28) 
through (32) [15 U.S.C. 77aa(28)-(32)], which require registrants to 
file underwriting agreements, opinions of counsel regarding the 
legality of the offering, material contracts, governing instruments 
(such as articles of incorporation, bylaws and partnership 
agreements) and agreements or indentures affecting the offered 
securities.
    \711\ For instance, in 1971, the Commission adopted a new 
exhibit requirement for a report on a material change in accounting 
principles or practices accompanied by a letter from the independent 
accountant approving or otherwise commenting on such changes. See 
Section IV.G.6. Similarly, in 1977, the Commission began requiring 
companies to file as exhibits copies of every contract specifically 
referred to in the company's discussion of its reportable industry 
segments. See infra note 754 and accompanying text.
    \712\ See Amendments Regarding Exhibit Requirements, Release No. 
33-6230 (Aug. 27, 1980) [45 FR 58822 (Sept. 5, 1980)] (``1980 
Exhibits Adopting Release''). Prior to 1980, exhibit requirements 
were included in each registration statement form or periodic report 
form and many requirements were inconsistent from form to form. The 
changes were intended to simplify and codify the exhibit 
requirements.
    \713\ With the adoption of the integrated disclosure system in 
1982, the Commission made technical changes to the exhibit 
requirements and re-designated the requirements from Item 7 to Item 
601. See 1982 Integrated Disclosure Adopting Release.
    \714\ See, e.g., Management's Report on Internal Control over 
Financial Reporting and Certification of Disclosure in Exchange Act 
Periodic Reporting, Release No. 33-8238 (June 5, 2003) [68 FR 36636 
(June 18, 2003)] (adopting Items 601(b)(31) and (b)(32) requiring 
companies to file the certifications mandated by Sections 302 and 
906 respectively of the Sarbanes-Oxley Act as exhibits to certain 
periodic reports); Disclosure Required by Sections 406 and 407 of 
the Sarbanes-Oxley Act of 2002, Release No. 33-8177 (Jan. 23, 2003) 
[68 FR 5110 (Mar. 31, 2003)] (``Audit Committee Financial Expert and 
Code of Ethics Adopting Release'') (adopting Item 601(b)(14), which 
requires companies to file a copy of any code of ethics that applies 
to the company's CEO, CFO and senior accounting personnel with their 
annual reports, as mandated by Section 406 of the Sarbanes-Oxley 
Act).
    \715\ See supra note 41.
    \716\ See, e.g., Mine Safety Disclosure Release (adopting Item 
601(b)(95) requiring companies that operate coal or other mines to 
provide information about mine safety required by Item 104 in an 
exhibit).
---------------------------------------------------------------------------

    To the extent that exhibits contain confidential and proprietary 
information, Commission rules permit registrants to omit this 
information from their public filings. For Exchange Act filings, 
registrants may obtain confidential treatment of information under Rule 
24b-2. This rule requires registrants seeking confidential treatment to 
submit an application to the Commission objecting to disclosure of such 
information along with an analysis of the applicable exemption under 
FOIA.\717\ Most applicants rely on the exemption that covers trade 
secrets and commercial or financial information obtained from a person 
and privileged or confidential.\718\ If the Commission grants the 
application, the registrant may omit the information from its public 
filings for a limited period of time identified in the 
application.\719\
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    \717\ Exchange Act Rule 24b-2 [17 CFR 240.24b-2]. The rule 
requires an application containing: An identification of the 
confidential portion; a statement of the grounds of objection 
referring to, and containing an analysis of, the applicable 
exemption(s) from disclosure under the Commission's rules and 
regulations adopted under FOIA, and a justification of the period of 
time for which confidential treatment is sought; a written consent 
to the furnishing of the confidential portion to other government 
agencies, offices or bodies and to the Congress; and the name of 
each exchange, if any, with which the material is filed. Id.
    \718\ See FOIA Section 552(b)(4) [5 U.S.C. 552(b)(4)] and Staff 
Legal Bulletin 1A.
    \719\ Exchange Act Rule 24b-2(b)(2)(ii) [240.24b-2(b)(2)(ii)]. 
In interpreting Rule 24b-2, the staff has indicated that the time 
period for confidential treatment generally will be limited to the 
duration of the contract, but no more than ten years. See Staff 
Legal Bulletin 1A.
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    We are seeking input on Item 601 of Regulation S-K to determine 
whether its requirements continue to provide investors with information 
important to making informed investment and voting decisions. 
Consistent with the scope of this release, we are considering only 
those exhibits required in quarterly and annual reports filed under the 
Exchange Act, which are identified in the following table.\720\ While 
we do not specifically address each exhibit in our discussion, we 
welcome comments on any of the items listed below.\721\
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    \720\ Many of the exhibits addressed in quarterly and annual 
reports are also required in current reports on Form 8-K. Though not 
within the scope of this release, the table includes exhibits 
required in current reports on Form 8-K to provide additional 
context.
    \721\ As part of its work to develop recommendations for the 
Commission for potential changes to update or simplify certain 
disclosure requirements, the staff is separately considering 
paragraphs (b)(11), (b)(12), (b)(19), (b)(22) and (b)(26) of Item 
601. The staff is also separately considering recommendations to 
aspects of Item 601(b)(25)(ii) and 601(a)(2) as part of this effort. 
For a description of this project, see Section I.
    \722\ A Form 8-K exhibit is required only if it is relevant to 
the subject matter reported on the Form 8-K report. For example, if 
the Form 8-K pertains to the departure of a director, only the 
exhibit described in paragraph (b)(17) of Item 601 must be filed.

----------------------------------------------------------------------------------------------------------------
                                                                                     Forms
                                                              --------------------------------------------------
                                                                  8-K \722\           10-Q             10-K
----------------------------------------------------------------------------------------------------------------
(1) Underwriting agreement...................................               X   ...............  ...............
(2) Plan of acquisition, reorganization, arrangement,                       X                X                X
 liquidation or succession...................................
(3)(i) Articles of incorporation.............................               X                X                X
    (ii) Bylaws..............................................               X                X                X
(4) Instruments defining the rights of security holders,                    X                X                X
 including indentures........................................
(7) Correspondence from an independent accountant regarding                 X   ...............  ...............
 non-reliance on a previously issued audit report or
 completed interim review....................................
(9) Voting trust agreement...................................  ...............  ...............               X
(10) Material contracts......................................  ...............               X                X
(11) Statement re computation of per share earnings..........  ...............               X                X
(12) Statements re computation of ratios.....................  ...............  ...............               X
(13) Annual report to security holders, Form 10-Q or           ...............  ...............               X
 quarterly report to security holders........................
(14) Code of Ethics..........................................               X   ...............               X
(15) Letter re unaudited interim financial information.......  ...............               X   ...............
(16) Letter re change in certifying accountant...............               X   ...............               X
(17) Correspondence on departure of director.................               X   ...............  ...............
(18) Letter re change in accounting principles...............  ...............               X                X
(19) Report furnished to security holders....................  ...............               X   ...............
(20) Other documents or statements to security holders.......               X   ...............  ...............
(21) Subsidiaries of the registrant..........................  ...............  ...............               X
(22) Published report regarding matters submitted to vote of   ...............               X                X
 security holders............................................
(23) Consents of experts and counsel.........................               X                X                X
(24) Power of attorney.......................................               X                X                X
(31)(i) Rule 13a-14(a)/15d-14(a) Certifications..............  ...............               X                X
    (ii) Rule 13a-14/15d-14 Certifications...................  ...............  ...............               X
(32) Section 1350 Certifications.............................  ...............               X                X
(33) Report on assessment of compliance with servicing         ...............  ...............               X
 criteria for asset-backed issuers...........................
(34) Attestation report on assessment of compliance with       ...............  ...............               X
 servicing criteria for asset-backed securities..............
(35) Servicer compliance statement...........................  ...............  ...............               X
(95) Mine Safety Disclosure Exhibit..........................  ...............               X                X
(99) Additional exhibits.....................................               X                X                X
(100) XBRL-Related Documents.................................               X                X                X
(101) Interactive Data File..................................               X                X                X
----------------------------------------------------------------------------------------------------------------


[[Page 23975]]

1. Request for Comment
    224. Should we modify or eliminate any of the exhibit requirements 
in Item 601? If so, which ones and why? Should we add any new exhibit 
requirements to Item 601? If so, what requirements should we add and 
why?
    225. Should we revise any of our exhibit requirements to change the 
presentation or format of the exhibits?
    226. Should the Commission consider changes to improve the 
usefulness of the exhibits? For example, should the exhibits be 
provided in a tagged or searchable manner?
    227. What types of investors or audiences are most likely to value 
the information that registrants disclose in the exhibits?
    228. What is the cost of providing the disclosure required under 
Item 601, including administrative and compliance costs of preparing 
and disseminating this disclosure? How would these costs change if we 
made any of the changes contemplated here? Please provide quantified 
estimates if possible and include only those costs associated with Item 
601.
2. Schedules and Attachments to Exhibits
    In response to Item 601, registrants generally must file exhibits 
as complete documents, including any schedules or attachments. These 
schedules and attachments can be lengthy and sometimes contain 
proprietary information. The only exception to the requirement to file 
schedules and attachments applies to a plan of acquisition, 
reorganization, arrangement, liquidation or succession filed under Item 
601(b)(2).\723\ The rule provides that schedules or similar attachments 
to these exhibits shall not be filed unless they contain information 
which is material to an investment decision and has not been disclosed 
otherwise.\724\
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    \723\ See Item 601(b)(2) of Regulation S-K [17 CFR 
229.601(b)(2)].
    \724\ Id. The exhibit filed must include a list briefly 
identifying the contents of all omitted schedules along with an 
agreement to provide a supplemental copy of any omitted schedules to 
the Commission upon request. Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested adding 
a new instruction to Item 601 permitting the omission of schedules to 
all exhibits required to be filed, unless such schedules contain 
material information that is not otherwise disclosed in the exhibit or 
in the filing, as is the case with current Item 601(b)(2).\725\ 
Alternatively, this commenter suggested that we revise Item 601 to 
permit companies to omit personally identifiable and similar 
information, such as bank account numbers and home addresses, without 
having to apply for confidential treatment to protect the 
information.\726\
---------------------------------------------------------------------------

    \725\ See ABA 2.
    \726\ Id.
---------------------------------------------------------------------------

b. Discussion
    The Commission first permitted registrants to omit schedules and 
attachments for Item 601(b)(2) exhibits in 1980.\727\ In revising the 
exhibit requirement, the Commission stated that many of the schedules 
received by the staff pursuant to the exhibit requirement were not 
material for investor information or protection and were unnecessary 
for Commission review purposes.\728\
---------------------------------------------------------------------------

    \727\ See 1980 Exhibits Adopting Release.
    \728\ See id.
---------------------------------------------------------------------------

    Material contracts filed under Item 601(b)(10) often include 
schedules that contain information that is not material to investors or 
that has been disclosed or sufficiently described elsewhere in the 
exhibit or in the disclosure. Examples of schedules and attachments 
providing information that may be immaterial include detailed product 
specifications attached to royalty agreements; implementation plans 
attached to service agreements; premises descriptions and plots as 
schedules to real estate leases; and licensing agreements with 
schedules listing immaterial patents. To the extent these schedules 
contain confidential and proprietary information, registrants may be 
permitted to omit such information from the public filing.\729\
---------------------------------------------------------------------------

    \729\ See supra notes 717, 718 and 719 and accompanying text.
---------------------------------------------------------------------------

c. Request for Comment
    229. Should we continue to allow registrants to omit schedules and 
attachments for exhibits filed under Item 601(b)(2)? Why? If so, what 
qualitative or quantitative factors should be considered when 
determining if omission is appropriate?
    230. Should we allow registrants to omit immaterial schedules and 
attachments from their filed exhibits? If so, should we expand this 
approach to all exhibits, or should we limit it to material contracts 
filed under Item 601(b)(10)? Should we provide examples or other 
guidance on how registrants could evaluate materiality for purposes of 
including schedules and attachments? If so, what type of guidance would 
be most useful for assessing the importance of the information (e.g., 
quantitative thresholds, qualitative factors)? What would be the 
potential benefits and challenges associated with such an approach? If 
registrants omit schedules and attachments based on immateriality, 
should we require registrants to disclose how they assessed materiality 
for these purposes?
    231. If we allow the omission of immaterial schedules and 
attachments from all or certain filed exhibits, should we require 
registrants to include with such exhibits a list briefly identifying 
the contents of all omitted schedules, together with an agreement to 
provide a supplemental copy of any omitted schedule to the Commission 
upon request, similar to the requirement in Item 601(b)(2)?
    232. Schedules and attachments to exhibits sometimes contain 
personally identifiable information (``PII''), and registrants may 
request confidential treatment of that information. Division staff 
generally does not object to the omission of PII from exhibits without 
a formal confidential treatment request, provided the registrant does 
not omit any other information from its exhibits. If we retain the 
requirement for registrants to file schedules and attachments to 
exhibits, should we codify current staff practice and permit 
registrants to omit PII without making a formal request under Rule 24b-
2 of the Exchange Act? Should we limit such an accommodation to 
information contained in schedules and attachments to exhibits, or 
should we expand it to all exhibit filings?
3. Amendments to Exhibits
    Any amendment or modification to a previously filed exhibit to a 
Form 10-K or Form 10-Q must be filed as an exhibit to a Form 10-K or 
Form 10-Q.\730\ Registrants generally must file such amendments or 
modifications regardless of the significance of the change.\731\ As a 
result, registrants may be required to file a significant number of 
amendments that are not necessarily material to investors. However, 
registrants are not required to file amendments or modifications when 
the previously filed exhibit would not currently be required.\732\
---------------------------------------------------------------------------

    \730\ Item 601(a)(4) of Regulation S-K [17 CFR 229.601(a)(4)].
    \731\ For a discussion of changes to exhibits and Instruction 1 
to Item 601, see Section IV.G.4.
    \732\ For example, a previously filed exhibit may no longer be 
material to a registrant as a result of the registrant's growth or 
change in business focus. The Commission revised Item 601 in 1982 to 
clarify that amendments and modifications must be filed only for 
currently required exhibits as opposed to previously filed exhibits 
that are no longer material and required to be filed. See 1982 
Integrated Disclosure Adopting Release.

---------------------------------------------------------------------------

[[Page 23976]]

    For amendments to articles of incorporation or bylaws, Item 601 
requires registrants to file a complete copy of the document as 
amended.\733\ Item 601 does not include a similar requirement for other 
exhibits, and registrants typically file amendments to these exhibits 
without filing a complete, amended and restated version of the 
agreement.
---------------------------------------------------------------------------

    \733\ Item 601(b)(3) of Regulation S-K [17 CFR 229.601(b)(3)]. 
If such amendment is being reported on Form 8-K, however, the 
registrant is required to file only the text of the amendment as a 
Form 8-K exhibit. In such case, a complete copy of the articles of 
incorporation or bylaws as amended must be filed as an exhibit to 
the next Securities Act registration statement or periodic report 
filed by the registrant to which this exhibit requirement applies. 
Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested 
revising Item 601(a)(4) to exclude amendments to material contracts 
that do not affect the economics of such contracts (e.g., technical 
amendments) from the requirement to file any amendment or modification 
to a previously filed exhibit.\734\
---------------------------------------------------------------------------

    \734\ See ABA 2.
---------------------------------------------------------------------------

b. Discussion
    With adoption of the integrated disclosure system, the Commission 
consolidated several requirements in Forms 10-Q and 10-K for amendments 
and modifications to previously filed exhibits.\735\ The new item 
required registrants to file as exhibits all amendments or 
modifications to exhibits that were previously filed with those 
forms.\736\ The requirement was moved to paragraph (a)(4) of Item 601 
in 1993 and has remained unchanged since.\737\
---------------------------------------------------------------------------

    \735\ See 1980 Exhibits Adopting Release. For example, prior to 
1980, Form 10-K required registrants to file copies of all 
amendments or modifications, not previously filed, to all exhibits 
previously filed, or copies of such exhibits as amended or modified. 
See, e.g., 1965 Amendments to Form 10-K Adopting Release.
    \736\ Id.
    \737\ See Rulemaking for EDGAR System, Release No. 33-6977 (Feb. 
23, 1993) [58 FR 14628 (Mar. 18, 1993)] at note 388.
---------------------------------------------------------------------------

    Registrants frequently amend agreements, such as credit facilities, 
licensing agreements, manufacturing agreements and supply agreements, 
to extend their duration. Registrants also amend credit facilities to 
increase the amount available for borrowing. Other than amended 
articles of incorporation or bylaws, multiple amendments to the same 
agreement may be dispersed among different periodic reports.
c. Request for Comment
    233. Should we continue to require registrants to file all 
amendments or modifications to previously filed exhibits as required 
under Item 601(a)(4)? Should we instead amend Item 601(a)(4) to exclude 
immaterial amendments? If so, should we provide guidance to registrants 
about how to determine whether an amendment is immaterial? Instead of 
materiality, should we permit registrants to exclude amendments based 
on a different standard? If so, what standard would be appropriate?
    234. Does an amendment-only exhibit provide investors with the 
information they need to evaluate the impact of the amendment on the 
registrant? Should we instead require registrants to file a complete, 
amended and restated agreement each time an exhibit is modified, 
consistent with the requirement for amendments to articles of 
incorporation and bylaws? If so, should we require registrants to 
identify changes in the amended and restated contracts such as by 
underlining or highlighting the changes? Would complying with such a 
requirement be more burdensome for agreements than for articles of 
incorporation or bylaws? If so, why?
4. Changes to Exhibits (Instruction 1 to Item 601)
    If an exhibit to a registration statement is filed in preliminary 
form, Instruction 1 to Item 601 provides that registrants are not 
required to file an amendment to the exhibit if it has been changed 
only (1) to insert certain information that appears elsewhere in an 
amendment to the registration statement or a prospectus filed pursuant 
to Securities Act Rule 424(b), or (2) to correct typographical errors, 
insert signatures or make other similar immaterial changes.\738\ No 
similar provision exists for exhibits to Exchange Act reports. 
Instruction 1 also provides that any such incomplete exhibit may not be 
incorporated by reference in any subsequent filing under any Act 
administered by the Commission.
---------------------------------------------------------------------------

    \738\ Instruction 1 to Item 601 of Regulation S-K [17 CFR 
229.601]. The instruction states that if an exhibit to a 
registration statement (other than an opinion or consent), filed in 
preliminary form, has been changed only (A) to insert information as 
to interest, dividend or conversion rates, redemption or conversion 
prices, purchase or offering prices, underwriters' or dealers' 
commissions, names, addresses or participation of underwriters or 
similar matters, which information appears elsewhere in an amendment 
to the registration statement or a prospectus filed pursuant to Rule 
424(b) under the Securities Act (230.424(b) of this chapter), or (B) 
to correct typographical errors, insert signatures or make other 
similar immaterial changes, then, notwithstanding any contrary 
requirement of any rule or form, the registrant need not refile such 
exhibit as so amended. Any such incomplete exhibit may not, however, 
be incorporated by reference in any subsequent filing under any Act 
administered by the Commission. Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended 
eliminating the last sentence of Instruction 1 to Item 601, which 
states that incomplete exhibits already on file that do not reflect the 
modifications described in the instruction may not be incorporated by 
reference in any subsequent filing.\739\
---------------------------------------------------------------------------

    \739\ See ABA 2.
---------------------------------------------------------------------------

b. Discussion
    The Commission adopted the predecessor to Instruction 1 of Item 601 
in 1954 in connection with new rules designed to simplify the 
registration procedure for offers involving competitive bidding.\740 \ 
Those rules provided that, if certain conditions were met, post-
effective amendments reflecting the results of the bidding would become 
effective without the need for a Commission order.\741\ This provision 
was intended to avoid the delay and attendant uncertainty that occurred 
between the filing and effectiveness of post-effective amendments.\742\ 
Consistent with this goal, the Commission eliminated a requirement for 
registrants to refile exhibits solely to insert interest rate, 
redemption prices and certain other offering-related information.\743\ 
The Commission retained this provision as Instruction 1 to Item 
601.\744\
---------------------------------------------------------------------------

    \740\ See Adoption of Rule 415 Relating to Competitive Bidding 
Registration Statements, Amendment of Rules 424, 427, 455, 471 and 
472 and Rescission of Rule 460, Release No. 33-3494 (Jan. 13, 1954) 
[not published in the Federal Register] (``1954 Adopting Release'').
    \741\ See id. At the time, registrants engaged in offerings 
involving competitive bidding were required to file post-effective 
amendments to registration statements at the time the bids were 
opened to reflect the results of the bidding. These post-effective 
amendments were only effective pursuant to an order from the 
Commission.
    \742\ See Notice of Proposal to Adopt Rule 415 Relating to 
Competitive Bidding Registration Statements, To Amend Rules 424, 
427, 455, 471 and 472 and to Rescind Rule 460, Release No. 33-3491-Z 
(Nov. 10, 1953) [not published in the Federal Register].
    \743\ See 1954 Adopting Release.
    \744\ See 1982 Integrated Disclosure Adopting Release. See also 
Proposed Rescission of Guides for the Preparation and Filing of 
Registration Statements and Reports, Release No. 33-6332 (Aug. 6, 
1981) [46 FR 41925 (Aug. 18, 1981)] (``Proposed Revision of 
Regulation S-K (1981)'') (proposing to incorporate the predecessor 
to Instruction 1 into the instructions to Item 601) and 1981 
Proposed Revisions (proposing to delete Rule 472(d), which addressed 
immaterial changes in exhibits, because its substance was proposed 
to be included in Item 601). In connection with the adoption of Rule 
430A, the Commission amended Instruction 1 to include a reference to 
prospectus supplements under Rule 424. See Elimination of Certain 
Pricing Amendments and Revision of Prospectus Filing Procedures, 
Release No. 33-6714 (May 27, 1987) [52 FR 21252 (June 5, 1987)].

---------------------------------------------------------------------------

[[Page 23977]]

    While Instruction 1 is intended to address timing concerns in 
certain registered offerings, it also affects registrants' ability to 
incorporate exhibits by reference to other filings. To the extent a 
registrant modifies an incomplete exhibit that was filed in preliminary 
form, as permitted under Instruction 1, the incomplete exhibit already 
on file may not be incorporated by reference into its Exchange Act 
reports. Instead, the registrant would be required to file the complete 
exhibit with an Exchange Act report for the relevant reporting period.
c. Request for Comment
    235. Should we eliminate Instruction 1?
    236. Should we expand the applicability of Instruction 1 to all 
filings? Should we expand the type of information in clauses (A) and 
(B) of Instruction 1 to cover additional types of information that, if 
changed, do not need to be refiled as an amendment to the exhibit?
    237. Instruction 1 states that any incomplete exhibit may not be 
incorporated by reference in any subsequent filing.\745\ Should we 
eliminate this limitation?
---------------------------------------------------------------------------

    \745\ For a discussion of incorporation by reference, see 
Section V.B.
---------------------------------------------------------------------------

5. Material Contracts (Item 601(b)(10))
    Item 601(b)(10) of Regulation S-K requires registrants to file 
material contracts that fall into one of three broad categories:
     All contracts not made in the ordinary course of business 
that are material to the registrant (Item 601(b)(10)(i));
     Contracts made in the ordinary course of business of a 
type that are specified in the rule (Item 601(b)(10)(ii)); and
     Management contracts and compensatory plans in which any 
director, named executive officer, or other executive officer of the 
registrant participates (Item 601(b)(10)(iii)).\746\
---------------------------------------------------------------------------

    \746\ As this release is focused on our business and financial 
disclosure requirements, we are not addressing Item 601(b)(10)(iii) 
of Regulation S-K [17 CFR 229.601(b)(10)(iii)].
---------------------------------------------------------------------------

    Any material contract that is executed or becomes effective during 
a reporting period must be filed as an exhibit to the Forms 10-Q or 10-
K for the corresponding period.\747\
---------------------------------------------------------------------------

    \747\ Item 601(a)(4) of Regulation S-K [17 CFR 229.601(a)(4) and 
Instruction 2 to Item 601(b)(10) of Regulation S-K [17 CFR 
229.601(b)(10)].
---------------------------------------------------------------------------

a. Contracts Not Made in the Ordinary Course--Item 601(b)(10)(i)
    Item 601(b)(10)(i) requires registrants to file every contract not 
made in the ordinary course of business that is material to the 
registrant and is to be performed in whole or in part at or after the 
filing of the report, or was entered into not more than two years 
before such filing.\748\ Registrants are required to file only those 
contracts to which the registrant or subsidiary of the registrant is a 
party or has succeeded to a party by assumption or assignment or in 
which the registrant or such subsidiary has a beneficial interest.
---------------------------------------------------------------------------

    \748\ Item 601(b)(10)(i) of Regulation S-K [17 CFR 
229.601(b)(10)(i)]. This requirement is virtually identical to 
paragraph 24 of Schedule A of the Securities Act. [15 U.S.C. 
77aa(24)].
---------------------------------------------------------------------------

i. Comments Received
    S-K Study. Two commenters stated that the agreements required to be 
filed pursuant to Item 601(b)(10)(i) often contain confidential 
information.\749\ These commenters also stated that the process of 
filing the agreements and obtaining confidential treatment is 
burdensome on registrants and provides information of limited value to 
investors.\750\
---------------------------------------------------------------------------

    \749\ See Silicon Valley; M. Liles.
    \750\ Id.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. None.
ii. Discussion
    In 1964, Congress expanded the information requirements for 
registration statements filed under Section 12 of the Exchange Act by 
adding a requirement to include material contracts not made in the 
ordinary course of business.\751\ Following these Exchange Act 
amendments, the Commission revised Form 10-K to make the form available 
for annual reports of all Exchange Act registrants and expanded the 
form's disclosure requirements.\752\ Among other changes, these 
amendments included a requirement in Form 10-K to file material 
contracts not made in the ordinary course of business, not previously 
filed and performed or to be performed at or after the beginning of the 
fiscal year covered by the report.\753\ This requirement was similar to 
the new requirement to file such exhibits with Exchange Act 
registration statements which, however, required this information for 
two years prior to filing of the registration statement.
---------------------------------------------------------------------------

    \751\ See Summary and Interpretation of Amendments to Securities 
Act of 1933 and Securities Exchange Act of 1934 Contained in the 
Securities Acts Amendments of 1964, Release No. 34-7425 (Sept. 15, 
1964) [29 FR 13455 (Sept. 30, 1964)].
    As amended, Section 12(b) required registrants to file material 
contracts, not made in the ordinary course of business, which are to 
be executed in whole or in part at or after the filing of the 
Exchange Act registration statement or which were made not more than 
two years before such filing. Schedule A includes a similar 
requirement for Securities Act registration statements. [15 U.S.C. 
77aa(24)]. As noted at the time, the amendment to Section 12(b) 
followed the Commission's recommendation that registration under 
both the Exchange Act and the Securities Act be made as similar as 
possible. See Lee J. Sclar, The Securities Acts Amendments of 1964: 
Selected Provisions and Legislative Deficiencies, 53 Cal. L. Rev. 
1494, 1515 (1965).
    The two-year requirement was intended as a ``cutoff period'' so 
registrants would not have to file all material contracts executed 
as early as 1932, even though they may have been fully performed 
years ago. See H.R Rep. No. 88-1418, 83rd Cong., 2nd Sess., 1964. 
See also Richard M. Phillips and Morgan Shipman, An Analysis of the 
Securities Acts Amendments of 1964, 1964 Duke L.J. 706, 788-789 
(1964).
    \752\ See 1965 Amendments to Form 10-K Adopting Release.
    \753\ Id. Similar to the language in amended Section 12(b) of 
the Exchange Act, the new requirement called for ``[c]opies of every 
material contract not made in the ordinary course of business and 
not previously filed which was performed or to be performed in whole 
or in part at or after the beginning of the fiscal year covered by 
the report on this form.'' Id. at 3433. The Commission adopted 
additional exhibit requirements with these amendments, which we 
discuss below in Section IV.G.5.b.
---------------------------------------------------------------------------

    In 1977, with the adoption of Regulation S-K, the Commission 
expanded the exhibit requirements for contracts not made in the 
ordinary course of business to include those that were material to an 
understanding of the registrant's overall business or specifically 
referred to in the registrant's discussion of its reportable industry 
segments.\754\ In 1980, the Commission eliminated the latter 
requirement,\755\ noting that many contracts referred to in the 
disclosure may not be material to the registrant.\756\ With this 
revision, the Commission sought to reduce the number of contracts 
required to be filed without impairing investor information or 
protection.\757\ In 1982, the Commission adopted the current 
requirements described in Items 601(b)(10)(i) and (ii) with the 
adoption of the integrated disclosure system.\758\
---------------------------------------------------------------------------

    \754\ See 1977 Regulation S-K Adopting Release.
    \755\ See 1980 Exhibits Adopting Release.
    \756\ See Proposed Amendments Regarding Exhibit Requirements, 
Release No. 33-6149 (Nov. 16, 1979) [44 FR 67143 (Nov. 23, 1979)] 
(``Proposed Amendments Regarding Exhibit Requirements Release'').
    \757\ See 1980 Exhibits Adopting Release. See also Proposed 
Amendments Regarding Exhibit Requirements Release.
    \758\ See 1982 Integrated Disclosure Adopting Release. See also 
Proposed Revision of Regulation S-K (1981). In connection with these 
amendments, the Commission revised Item 601(b)(10)(ii)(D) to require 
that only material leases be filed as exhibits and revised Item 
601(b)(10)(iii) regarding management contracts and compensatory 
plans.

---------------------------------------------------------------------------

[[Page 23978]]

    In 2004, the Commission adopted Items 1.01 and 1.02 of Form 8-K, 
which require disclosure when a registrant enters into, amends or 
terminates an agreement that is material to the registrant and is not 
made in the ordinary course of business.\759\ In the proposing release, 
the Commission sought comment on whether it should use a disclosure 
threshold that is tied to a financial measure, rather than 
materiality.\760\ The Commission ultimately adopted the reporting 
requirements with a materiality threshold because the standard was 
``already familiar to reporting companies,'' noting that the 
materiality threshold parallels the materiality threshold for filing 
this type of agreement under Item 601(b)(10) of Regulation S-K.\761\
---------------------------------------------------------------------------

    \759\ See 2004 Form 8-K Adopting Release. See also Items 1.01 
and 1.02 of Form 8-K.
    \760\ See 2002 Form 8-K Proposing Release at 42917 (``Because we 
believe that agreements can be material for reasons other than the 
monetary amount involved, we propose to require disclosure under 
this item based on a `materiality' standard and do not propose to 
tie the disclosure to a financial measure.'').
    \761\ See 2004 Form 8-K Adopting Release at 15596. See also 
Instruction 1 to Item 1.01 of Form 8-K.
---------------------------------------------------------------------------

iii. Request for Comment
    238. Item 601(b)(10)(i) does not include any guidance for 
determining whether a contract not made in the ordinary course of 
business is material to a registrant. Should we consider revising the 
requirement to provide quantitative or other thresholds for determining 
when a contract is material to the registrant? If so, how should we 
define these thresholds? Would such a change facilitate registrants' 
compliance with this item requirement? Would such a change result in 
disclosure that is useful to investors?
    239. Does ``not made in the ordinary course of business'' provide a 
clear standard for agreements covered by the rule? Should a different 
standard to apply? Should we revise Item 601(b)(10)(i) to define the 
types of contracts not made in the ordinary course of business that 
companies are required to file as exhibits? If so, how should we define 
such contracts?
    240. Item 601(b)(10)(i) requires registrants to file material 
contracts that either (i) are to be performed in whole or in part at or 
after the filing of the periodic report, or (ii) were entered into not 
more than two years before such filing. This requirement was enacted in 
the context of requiring material contracts for newly reporting 
registrants that were entered into within the last two years but may 
have been fully performed before the period covered by the report. Do 
such contracts continue to be important to investors? Should we limit 
subparagraph (ii) to newly reporting registrants? For registrants that 
are already subject to reporting requirements, should we eliminate 
subparagraph (ii) and require registrants to file only material 
contracts that are to be performed in whole or in part at or after the 
filing of the report? Should we revise Item 601(b)(10)(i) to require 
all material agreements to be filed regardless of when they were 
entered into, as long as such agreements remain material to the 
registrant? Under what circumstances could a contract remain material 
to a registrant if it has been fully performed in a prior period?
b. Certain Contracts Made in the Ordinary Course--Item 601(b)(10)(ii)
    Contracts made in the ordinary course of business conducted by a 
registrant and its subsidiaries generally do not need to be filed. Item 
601(b)(10)(ii), however, establishes specific exceptions to the general 
rule and requires certain contracts to be filed even when they 
ordinarily accompany the kind of business conducted by the registrant 
and its subsidiaries. The following types of contracts must be filed, 
except where immaterial in amount or significance:
     Any contract to which directors, officers, voting 
trustees, security holders named in the registration statement or 
report, or underwriters are parties, other than contracts involving 
only the purchase or sale of current assets that have a determinable 
market price, at such market price; \762\
---------------------------------------------------------------------------

    \762\ Item 601(b)(10)(ii)(A) of Regulation S-K [17 CFR 
229.601(b)(10)(ii)(A)].
---------------------------------------------------------------------------

     Any contract upon which the registrant's business is 
substantially dependent, such as continuing contracts to sell the major 
part of the registrant's products or services or to purchase the major 
part of the registrant's requirements of goods, services or raw 
materials or any franchise or license or other agreement to use a 
patent, formula, trade secret, process or trade name upon which the 
registrant's business depends to a material extent; \763\
---------------------------------------------------------------------------

    \763\ Item 601(b)(10)(ii)(B) of Regulation S-K [17 CFR 
229.601(b)(10)(ii)(B)].
---------------------------------------------------------------------------

     Any contract calling for the acquisition or sale of any 
property, plant or equipment for a consideration exceeding fifteen 
percent of such fixed assets of the registrant on a consolidated basis; 
\764\ or
---------------------------------------------------------------------------

    \764\ Item 601(b)(10)(ii)(C) of Regulation S-K [17 CFR 
229.601(b)(10)(ii)(C)].
---------------------------------------------------------------------------

     Any material lease under which a part of the property 
described in the filing is held by the registrant.\765\
---------------------------------------------------------------------------

    \765\ Item 601(b)(10)(ii)(D) of Regulation S-K [17 CFR 
229.601(b)(10)(ii)(D)].
---------------------------------------------------------------------------

i. Comments Received
    S-K Study. We received letters from two commenters addressing the 
requirement in Item 601(b)(10)(ii)(B) to file any contract upon which 
the registrant's business is substantially dependent, as in the case of 
a continuing contract to sell the major part of a registrant's products 
or services or to purchase the major part of a registrant's 
requirements for goods, services or raw materials. Both commenters 
requested guidance interpreting the phrase ``the major part'' to mean 
agreements involving a majority of the products or services sold or 
purchased.\766\ Both commenters also noted that the filing threshold 
for agreements that are ``immaterial in amount or significance'' as it 
relates to Item 601(b)(10)(ii)(A) leads to a disproportionate burden on 
EGCs, which frequently enter into agreements with parties that have a 
five percent or greater ownership of the registrant.\767\ These 
commenters suggested that other disclosure provisions require the 
filing or disclosure of ``relevant information'' regarding these 
related party agreements.\768\
---------------------------------------------------------------------------

    \766\ See Silicon Valley; M. Liles.
    \767\ Id.
    \768\ Id. (referring to Item 404(a) for disclosure of related 
party agreements, Item 601(b)(4) for agreements establishing the 
terms of the registrant's securities, and financial statement 
footnotes for disclosure about joint venture agreements).
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. One commenter noted that the 
reference in Item 601(b)(10)(ii)(B) to contracts to sell the major part 
of a registrant's products or services is tied neither to a specific 
quantitative threshold nor to materiality.\769\ This commenter 
recommended that the Commission undertake a study to harmonize various 
qualitative disclosure thresholds in Regulation S-K, such as ``major 
part'' in Item 601(b)(10)(ii)(B) and ``major significance'' in Item 
102, to reduce the ambiguity in their application. This commenter also 
suggested revising Item 601(b)(10)(ii) so that contracts with certain 
insiders or other parties identified in the item need not be filed if 
they contain terms no less favorable to the registrant than terms that 
could have been obtained from unrelated third parties. Another 
commenter

[[Page 23979]]

recommended eliminating the requirement in Item 601(b)(10)(ii)(D) to 
file material leases and suggested that disclosure about physical 
properties usually does not provide investors with meaningful 
information.\770\
---------------------------------------------------------------------------

    \769\ See ABA 2.
    \770\ See Shearman.
---------------------------------------------------------------------------

ii. Discussion--Background and Scope of Item 601(b)(10)(ii)
    The Commission's 1965 amendments to Form 10-K included a 
requirement for registrants to file as exhibits certain specified 
contracts made in the ordinary course of business.\771\ The contracts 
specified in Form 10-K at that time were similar to those identified 
today in Item 601(b)(10)(ii).\772\ In addition, Form 10-K included a 
catch-all requirement to file an exhibit when the ``amount of the 
contract, or its importance to the business of the registrant and its 
subsidiaries, [is] material, and the terms and conditions are of a 
nature of which investors reasonably should be informed.'' \773\
---------------------------------------------------------------------------

    \771\ See 1965 Amendments to Form 10-K Adopting Release.
    \772\ See id. The 1965 amendments consisted of the following six 
categories: ``(1) Directors, officers, promoters, voting trustees, 
or security holders named in answer to Item 5 [Principal Holders of 
Voting Securities] are parties thereto except where the contract 
merely involves purchase or sale of current assets having a 
determinable market price, at such price; (2) It is of such 
materiality as to call for specific reference to it in answer to 
Item 4 [Changes in the Business] or 9 [Interest of Management and 
Others in Certain Transactions]; (3) The registrant's business is 
substantially dependent upon it, as in the case of continuing 
contracts to sell the major part of registrant's production in the 
case of a manufacturing enterprise or to purchase the major part of 
registrant's requirements of goods in the case of a distribution 
enterprise, or licenses to use a patent or formula upon which 
registrant's business depends to a material extent; (4) It calls for 
the acquisition or sale of fixed assets for a consideration 
exceeding 10 percent of all fixed assets of the registrant and its 
subsidiaries; (5) It is a lease under which a material amount of 
property is held by the registrant; or (6) The amount of the 
contract, or its importance to the business of the registrant and 
its subsidiaries, are material, and the terms and conditions are of 
a nature of which investors reasonably should be informed.'' Id. at 
3433.
    \773\ Id. at 3433.
---------------------------------------------------------------------------

    In 1980, the Commission codified in Regulation S-K the exhibit 
filing requirements, including the filing requirements for material 
contracts.\774\ The requirements adopted in 1980 modified the existing 
requirements and were substantially similar to the current requirements 
in Item 601(b)(10)(ii)(A)-(D). The Commission modified the requirement 
to file agreements for the acquisition or sale of ``fixed assets,'' 
adopting instead a requirement to file contracts for the acquisition or 
sale of any ``property, plant or equipment.''
---------------------------------------------------------------------------

    \774\ See 1980 Exhibits Adopting Release.
---------------------------------------------------------------------------

iii. Request for Comment
    241. Should we expand Item 601(b)(10)(ii) to include other types of 
contracts that, although made in the ordinary course of business, 
should be filed?
    242. Should we revise our overall approach to Item 601(b)(10)(ii) 
and if so, how? Rather than specifying categories of contracts, is 
there an alternative approach that would appropriately capture those 
ordinary course contracts that are important to investors? For example, 
should we replace the current requirements in Item 601(b)(10)(ii)(A)-
(D) with a requirement for registrants to file all ordinary course 
contracts entered into (i) since the beginning of the last fiscal year, 
(ii) that exceed a percent of some measure, such as revenue or net 
income and (iii) where the registrant has a direct or indirect material 
interest? If we took this approach, how should we establish the 
relevant time frame and percentage threshold and what measures should 
we use? What would be the benefits and challenges of such an approach?
    243. Do contracts that are required to be filed pursuant to Item 
601(b)(10)(ii) contain information that is important to an 
understanding of the registrant or its business? Are the types of 
contracts identified in Item 601(b)(10)(ii) sufficiently significant 
that they should be filed, notwithstanding that they were made in the 
ordinary course of business?
    244. Is ``immaterial in amount or significance'' a helpful standard 
by which to determine when a contract need not be filed? How do 
registrants currently apply this standard? Should we revise the item to 
provide guidance on the meaning of that phrase? Is it possible for 
contracts to be material in amount but not in significance? Should we 
revise the item to exclude only contracts that are immaterial in amount 
and significance? Would it facilitate compliance if we revised Item 
601(b)(10)(ii) to state in the affirmative that registrants must file 
all material contracts made in the ordinary course of business that 
fall within one or more of the categories listed?
    245. Item 404(a) of Regulation S-K requires disclosure of any 
related party transaction since the beginning of the registrant's last 
fiscal year if the amount involved exceeds $120,000.\775\ Unlike this 
bright-line disclosure threshold in Item 404(a), Item 601(b)(10)(ii)(A) 
generally requires registrants to file related party contracts as 
exhibits unless immaterial in amount or significance. Do the two 
different disclosure thresholds provide investors with the information 
they need to evaluate related party contracts? Should we revise Item 
601(b)(10)(ii) to require registrants to file as exhibits all contracts 
involving related party transactions disclosed pursuant to Item 404(a)? 
What would be the benefits and challenges associated with such a 
revision?
---------------------------------------------------------------------------

    \775\ Item 404(a) of Regulation S-K [17 CFR 229.404(a)]. 
Registrants must describe any transaction, since the beginning of 
the registrant's last fiscal year, or any currently proposed 
transaction, in which the registrant was or is to be a participant 
and the amount involved exceeds $120,000, and in which any related 
person had or will have a direct or indirect material interest. Id.
---------------------------------------------------------------------------

    246. Taken together, Items 601(b)(10)(i) and (ii) require 
registrants to file material contracts not made in the ordinary course 
of business as well as certain contracts made in the ordinary course of 
business that are material to the registrant. Should we revise Item 
601(b)(10)(ii) to require registrants simply to file all contracts that 
are material to an understanding of the registrant or its business, 
whether or not entered in the ordinary course of business? Are there 
any contracts currently required to be filed as exhibits under Item 
601(b)(10)(ii) that would not be captured by such a principles-based 
approach? Conversely, would this approach require registrants to file 
material ordinary course contracts that they are not currently required 
to file? Would this change enhance the information available to 
investors? What would be the benefits and challenges of this approach?
iv. Discussion--Disclosure Thresholds under Item 601(b)(10)(ii)
    Qualitative Thresholds. Item 601(b)(10)(ii)(B) requires registrants 
to file any contract upon which the registrant's business is 
substantially dependent. The item provides examples of contracts upon 
which a registrant may be substantially dependent, such as continuing 
contracts to sell the major part of a registrant's products or services 
or to purchase the major part of a registrant's requirements of goods, 
services or raw materials.\776\ A registrant's business also may be 
substantially dependent on any franchise or license or other agreement 
to use a patent, formula, trade secret, process or trade name upon 
which the registrant's business depends to a material extent.\777\ 
Since the item's adoption in 1965, the Commission has not provided 
registrants with additional guidance about how to determine

[[Page 23980]]

``substantial dependence'' or ``major part,'' as those terms are used 
in the exhibits requirements.
---------------------------------------------------------------------------

    \776\ Item 601(b)(10)(ii)(B) of Regulation S-K [17 CFR 
229.601(b)(10)(ii)(B)].
    \777\ Id.
---------------------------------------------------------------------------

    To enhance consistency and clarity, we are considering whether to 
quantify ``substantial dependence'' as used in the item. Possible 
alternatives include establishing a dollar amount or percentage 
threshold, similar to the thresholds used in Item 601(b)(10)(ii)(C), as 
described below. While an objective requirement may provide clarity for 
registrants in their efforts to comply with the exhibit requirements, 
this approach could inadvertently exclude material contracts or result 
in a large number of contracts being filed that contain information 
that is neither material nor useful for investors.
    Quantitative Thresholds. Unlike subparagraph (B), which relies on a 
qualitative threshold, subparagraph (C) provides a quantitative 
threshold for filing exhibits. Specifically, Item 601(b)(10)(ii)(C) 
requires registrants to file any contract calling for the acquisition 
or sale of any property, plant or equipment for a consideration 
exceeding fifteen percent of such fixed assets of the registrant on a 
consolidated basis.\778\
---------------------------------------------------------------------------

    \778\ Item 601(b)(10)(ii)(C) of Regulation S-K [17 CFR 
229.601(b)(10)(ii)(C)].
---------------------------------------------------------------------------

    As originally adopted in 1965, this requirement used a threshold of 
ten percent of all fixed assets of a registrant and its subsidiaries. 
In 1980, the Commission raised the threshold to fifteen percent,\779\ 
consistent with similar requirements on Form S-1 at the time. In doing 
so, the Commission increased the threshold triggering the filing of 
such an agreement from consideration exceeding ``10 percent of all 
fixed assets of the registrant and its subsidiaries'' to consideration 
exceeding ``15 percent of such fixed assets of the registrant on a 
consolidated basis.'' \780\ In the adopting release, the Commission 
stated that the higher threshold was consistent with the purpose of 
reducing the burden that exhibit filing requirements impose on 
registrants ``without materially impairing investor information or 
protection.'' \781\
---------------------------------------------------------------------------

    \779\ See 1980 Exhibits Adopting Release.
    \780\ See Technical Amendments to Rules, Forms and Schedules; 
Delegation of Authority to the Director of the Division of 
Corporation Finance, Release No. 33-6260 (Nov. 13, 1980) [45 FR 
76974 (Nov. 21, 1980)]. This release corrected the regulatory text 
adopted in the 1980 Exhibits Adopting Release, which ``inadvertently 
chang[ed] the materiality test from a percentage of fixed assets to 
a percentage of all assets.'' Id. at 76976.
    \781\ 1980 Exhibits Adopting Release at 58823.
---------------------------------------------------------------------------

    In contrast to Item 601(b)(10)(ii)(C), Item 2.01 of 8-K requires a 
registrant to report the acquisition or disposition of a ``significant 
amount of assets.'' \782\ Instruction 4 to Item 2.01 provides that an 
acquisition or disposition shall be deemed to involve a significant 
amount of assets (i) if the registrant's and its other subsidiaries' 
equity in the net book value of such assets or the amount paid or 
received for the assets upon such acquisition or disposition exceeded 
ten percent of the total assets of the registrant and its consolidated 
subsidiaries; or (ii) if it involved a business that is 
significant.\783\ In addition, Form 8-K encompasses any acquisition or 
disposition, while Item 601(b)(10)(ii)(C) is limited to the acquisition 
of property, plant or equipment. Accordingly, an acquisition could 
trigger a disclosure requirement under Item 2.01 of Form 8-K without 
triggering a requirement to file the related contract under Item 
601(b)(10)(ii)(C).
---------------------------------------------------------------------------

    \782\ A registrant must file a Form 8-K report if it has 
completed the acquisition or disposition of a significant amount of 
assets otherwise than in the ordinary course of business.
    \783\ Form 8-K [17 CFR 249.308]. For the definitions of 
``business'' and ``significant,'' Instruction 4 refers to Rule 11-
01(d) and (b), respectively, of Regulation S-X [17 CFR 210.11-01].
---------------------------------------------------------------------------

    When proposing amendments to Form 8-K in 2002, the Commission 
sought comment on whether to remove the ten percent test from Item 2.01 
and replace it with the more general ``materiality'' test used in Item 
1.01 of Form 8-K.\784\ Although several commenters supported 
harmonization between the reporting thresholds in Items 1.01 and 2.01, 
the Commission retained the ten percent test for Item 2.01, stating its 
intention that Item 1.01 address a different scope of agreements than 
those that trigger disclosure under Item 2.01. The Commission also 
indicated it did not believe that the use of two different thresholds 
will cause undue confusion.\785\
---------------------------------------------------------------------------

    \784\ See 2002 Form 8-K Proposing Release. The Commission 
proposed retaining the ten percent threshold in Instruction 4 of 
Item 2.01 due to ``companies' familiarity with th[e] test.'' Id. at 
42919.
    \785\ See 2004 Form 8-K Adopting Release.
---------------------------------------------------------------------------

    We are seeking public input on whether the fifteen percent 
threshold in Item 601(b)(10)(ii)(C) continues to provide investors with 
information that is important for an understanding of a registrant's 
business. We are interested in receiving input on whether a 
quantitative threshold is useful and, if so, whether fifteen percent of 
fixed assets is the appropriate measure. We also seek comment on the 
scope of contracts covered by subparagraph (C) and whether we should 
broaden the scope to better harmonize the exhibit filing requirements 
with the Form 8-K disclosure requirements. In addition, we are seeking 
public input on whether quantitative thresholds would be appropriate 
for other types of agreements required to be filed under Item 
601(b)(10)(ii).
v. Request for Comment
    247. Should we adopt additional or different qualitative or 
quantitative thresholds for determining when contracts identified in 
Item 601(b)(10)(ii) must be filed as exhibits? If so, what should these 
qualitative or quantitative thresholds be? Why?
    248. Should we revise Item 601(b)(10)(ii)(B) to provide qualitative 
or quantitative standards for what constitutes ``substantial 
dependence''? Should we define the term ``major part'' in addition to 
or in lieu of defining ``substantial dependence''? What factors should 
we consider in developing definitions or quantitative thresholds? What 
other alternatives should we consider to clarify which contracts must 
be filed under Item 601(b)(10)(ii)?
    249. How could we design a quantitative threshold that would 
accommodate the diversity of registrants and business models? What 
would be the disadvantages of a quantitative threshold? If we used 
quantitative measures based on registrants' financial statements, what 
would be the appropriate measures to use? Alternatively, should we tie 
the threshold to a registrant's market capitalization?
    250. Should we provide guidance on the phrase ``depends to a 
material extent'' in Item 601(b)(10)(ii)(B)? If so, should we adopt a 
similar approach to the one discussed in the preceding request for 
comment? Alternatively, should our requirements distinguish franchise 
or license agreements to use a patent, formula, trade secret, process 
or trade name from contracts to sell the major part of a registrant's 
products or services or to purchase the major part of a registrant's 
requirements of goods, services or raw materials?
    251. Should we revise Item 601(b)(10)(ii)(C) to either increase or 
decrease the fifteen percent threshold for exhibits relating to 
acquisitions of property, plant or equipment? Should the threshold 
continue to be based on fixed assets? Alternatively, should we 
eliminate the threshold in favor of a principles-based requirement, 
such as ``material'' or ``significant'' acquisitions of property, plant 
or equipment?
    252. Should Item 601(b)(10)(ii)(C) continue to focus on property, 
plant and equipment? Should we expand the scope to require registrants 
to file contracts for the acquisition or

[[Page 23981]]

disposition of other assets, including intangible assets such as 
patents, licenses and other intellectual property? If so, should we 
consider a disclosure threshold consistent with Item 2.01 of Form 8-K? 
Would a different threshold be more appropriate?
6. Preferability Letter (Item 601(b)(18))
    Registrants will, at times, make a voluntary change in accounting 
principles or practices when two or more generally accepted accounting 
principles apply. For example, a registrant may choose to switch its 
inventory valuation from last-in, first-out to first-in, first-out. 
When such a change occurs, Item 601(b)(18) requires a registrant to 
file a letter from its independent accountant indicating whether, in 
the independent accountant's judgment, the change is preferable under 
the circumstances.\786\ No letter is required for changes made in 
response to a standard adopted by the FASB that creates a new 
accounting principle, expresses a preference for an accounting 
principle, or rejects a specific accounting principle.\787\
---------------------------------------------------------------------------

    \786\ Item 601(b)(18) of Regulation S-K [17 CFR 229.601(b)(18)]. 
Item 601(b)(18) refers to ``independent accountant.'' We also refer 
to ``independent accountant,'' as ``independent auditor'' in this 
release.
    \787\ Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. None.
b. Discussion
    The precursor to Item 601(b)(18), adopted in 1971, required 
registrants to describe and state the reasons for any change in 
accounting principles or practices that would materially affect the 
financial statements filed or to be filed for the current year.\788\ 
Registrants also were required to file as an exhibit to Form 10-K or 
Form 10-Q a letter from the independent accountant approving or 
otherwise commenting on such changes.\789\
---------------------------------------------------------------------------

    \788\ See Notice of Adoption of Amendments to Form 8-K, Form 7-
Q, Form 10-Q, Form 10-K and Form N-1Q, Release No. 34-9344 (Sept. 
27, 1971) [not published in the Federal Register].
    \789\ See id.
---------------------------------------------------------------------------

    In 1975, the Commission amended Form 10-Q to require the 
accountant's letter to state whether the change, in the accountant's 
judgment, is preferable.\790\ Several commenters objected to the 
requirement, stating that no standards existed for judging 
preferability among generally accepted accounting principles and that 
authoritative accounting principles only required management to justify 
that a change was preferable. The Commission concluded, however, that 
management's justification for a change in accounting principle must 
convince an independent accountant that, in the accountant's judgment, 
the new accounting principle is an improvement over alternative 
principles.\791\ The requirement for a preferability letter was 
included in Form 10-K in 1980 when the Commission centralized all 
exhibit requirements within Regulation S-K.\792\
---------------------------------------------------------------------------

    \790\ See 1975 Interim Financial Reporting Release.
    \791\ See id. The Commission based its rationale on the 
Accounting Principles Board Opinion No. 20 (since replaced by 
Statement of Financial Accounting Standards No. 154 (ASC Topic 
250)), which stated that (i) there is a presumption that an 
accounting principle once adopted should not be changed, (ii) that 
presumption may be overcome only if the company justifies the use of 
an alternative acceptable accounting principle on the basis that it 
is preferable, and (iii) the burden of justifying a change in 
accounting principle rests with the company proposing the change. 
See Proposals to Increase Disclosure of Interim Results by 
Registrants.
    \792\ See 1980 Exhibits Adopting Release. See also supra note 
712 and accompanying text.
---------------------------------------------------------------------------

    While Item 601(b)(18) requires an auditor to articulate the 
preferability of a change in accounting principle or policy, the nature 
of the auditors' statements varies.\793\ In addition, there is no 
standard methodology for determining preferability. Since 2000, the 
number of preferability letters filed in a given year has fluctuated 
from a high of 108 in 2000 to a low of 57 in 2007.\794\
---------------------------------------------------------------------------

    \793\ As an example, one auditor's letter reads: ``There are no 
authoritative criteria for determining a `preferable' presentation 
method based on the particular circumstances; however, we conclude 
that such change in the method of accounting is to an acceptable 
alternative method which, based on your business judgment to make 
this change and for the stated reasons, is preferable in your 
circumstances.'' Another states: ``Based on our review and 
discussion, with reliance on management's business judgment and 
planning, we concur that the newly adopted method of accounting is 
preferable in the Company's circumstances.'' Another auditor's 
letter provides: ``We believe, on the basis of the facts so set 
forth and other information furnished to us by appropriate officials 
of the Company, that the accounting change described in your Form 
10-Q is to an alternative accounting principle that is preferable 
under the circumstances.'' One preferability letter briefly states: 
``In our judgment, such change is an alternative accounting 
principle that is preferable under the circumstances.''
    \794\ See Audit Analytics, Preferability Letters: A 15 Year 
Review, Jan. 2, 2015, available at https://www.auditanalytics.com/blog/preferability-letters-a-15-year-review. Over the last fifteen 
years the most common reasons for filing preferability letters have 
been changes in accounting principles or practices related to: (1) 
Goodwill Impairment Measurement Date; (2) Inventory Valuation; (3) 
Expense Recognition; (4) Classification; and (5) Benefits Program.
---------------------------------------------------------------------------

    In addition to the exhibit requirement of Item 601(b)(18), 
disclosure about a voluntary change in accounting principles is 
required under Rule 10-01(b)(6) of Regulation S-X and under U.S. GAAP. 
In certain instances, Public Company Accounting Oversight Board 
(``PCAOB'') Auditing Standards require auditors to address such changes 
in their opinions. While U.S. GAAP and PCAOB Auditing Standards require 
consideration of a registrant's change in accounting principle or 
practice, they differ from the Commission's requirements in terms of 
nature, timing and extent of reporting by the auditor. We are 
interested in commenters' views on whether existing disclosure 
requirements provide investors with sufficient information about a 
change in accounting principle without the need for registrants to file 
a preferability letter.
    Commission Requirements. Rule 10-01(b)(6) of Regulation S-X 
requires registrants to (1) state in the notes to the financial 
statements the date and reasons for any material accounting change and 
(2) file, in accordance with Item 601(b)(18), a letter from the 
registrant's independent accountant as an exhibit to Form 10-Q.\795\
---------------------------------------------------------------------------

    \795\ Rule 10-01(b)(6) of Regulation S-X [17 CFR 210.10-
01(b)(6)]. Rule 8-03(b)(5) of Regulation S-X is the equivalent 
requirement for SRCs. As part of its work to develop recommendations 
for the Commission for potential changes to update or simplify 
certain disclosure requirements, the staff is separately considering 
Rules 8-03(b)(5) and 10-01(b)(6) of Regulation S-X which require 
registrants to disclose the date and reasons for any material 
accounting change. For a description of this project, see Section I.
---------------------------------------------------------------------------

    U.S. GAAP. U.S. GAAP requires disclosure in the notes to the 
financial statements about the nature of and reason for a change in 
accounting principle, including an explanation of why the newly adopted 
principle is preferable.\796\ Registrants must report the change in 
accounting principle in the financial statements of both the interim 
and annual period of the change.\797\
---------------------------------------------------------------------------

    \796\ See ASC 250-10-50-1(a). ASC 250-10-45-12 also requires 
companies to justify the use of an alternative accounting principle 
on the basis that it is preferable.
    \797\ See ASC 250-10-50-2.
---------------------------------------------------------------------------

    PCAOB Auditing Standards. PCAOB Auditing Standard No. 6 (``AS No. 
6'') requires auditors to evaluate a change in accounting principle to 
determine whether, among other things, the registrant ``has justified 
that the alternative accounting principle is preferable.'' \798\ AU 
Section 722

[[Page 23982]]

addresses the review of interim financial statements and requires the 
auditor to, among other things, make inquiries of management on changes 
in accounting principles or methods of application. AU 722 does not 
require the auditor to specifically express a view on the preferability 
of the change as part of an interim review.
---------------------------------------------------------------------------

    \798\ AS No. 6, paragraph 7. See also Auditing Standard No. 6--
Evaluating Consistency of Financial Statements and Conforming 
Amendments, PCAOB Release No. 2008-001, Jan. 29, 2008, at note 14, 
available at https://pcaobus.org/Rules/Rulemaking/Docket023/PCAOB_Release_No._2008-001--Evaluating_Consistency.pdf (noting that 
the language in AS No. 6 was updated ``to be consistent with SFAS 
No. 154''). The PCAOB adopted AS No. 6, in part, in response to the 
FASB's issuance of Statement of Financial Accounting Standards No. 
154 (ASC 250). See supra note 791. AS No. 6 requires the auditor to 
assess whether the company has met its burden of justifying the 
change in accounting principle as set forth in SFAS No. 154 (ASC 
250).
---------------------------------------------------------------------------

    The auditor's opinion on the annual financial statements must 
discuss the nature of the change in accounting principle if the change 
has a material effect on the financial statements, but may not 
necessarily address preferability.\799\ Under AU 508, the auditor is 
not required to opine explicitly on the preferability of the change. 
Rather, if the auditor concludes a registrant has justified that the 
alternative accounting principle is preferable (as required by AS No. 6 
and U.S. GAAP), then it must include an explanatory paragraph in its 
report identifying the nature of the change, if the change has a 
material effect on the financial statements.\800\ If the auditor 
concludes that the registrant has not justified the preferability of 
the alternative accounting principle, the auditor should consider the 
matter a departure from U.S. GAAP and, if the effect of the change in 
accounting principle is material, issue either a qualified or adverse 
opinion.\801\ Consequently, where the change in accounting principle is 
material, an auditor's report without a qualified or adverse opinion 
and identifying the nature of the change is akin to the preferability 
letter filed under Item 601(b)(18) as both documents convey the 
auditor's conclusion that the registrant has justified that the 
alternative accounting principle is preferable.
---------------------------------------------------------------------------

    \799\ See AU 508, Paragraph 17A.
    \800\ See id.
    \801\ See AU 508, Paragraph 17E.
---------------------------------------------------------------------------

    Unlike a preferability letter filed under Item 601(b)(18), the 
audit opinion will include an explicit statement as to preferability 
only when the registrant has not provided a reasonable justification 
that the alternative accounting principle is preferable.\802\ 
Additionally, while Item 601(b)(18) requires registrants to file a 
preferability letter with the first Form 10-Q following the date of the 
accounting change, AU 508 requires a statement in the opinion about 
this change only in the annual financial statements on Form 10-K. U.S. 
GAAP requires disclosure about this change in the notes to the interim 
financial statements.\803\
---------------------------------------------------------------------------

    \802\ See AU 508, Paragraph 52.
    \803\ See supra note 797 and accompanying text. Under U.S. GAAP, 
companies should, whenever possible, adopt any accounting changes 
during the first interim period of a fiscal year. See ASC Topic 250-
10-45-16.
---------------------------------------------------------------------------

    We are seeking public input on whether to eliminate the exhibit 
requirement of Item 601(b)(18) in light of the significant overlap with 
the accounting requirements under U.S. GAAP and the PCAOB auditing 
standards. We are also interested in whether requirements in U.S. GAAP 
and PCAOB auditing standards are sufficient to alert investors to 
changes in a registrant's accounting policies or principles. We also 
seek input on the utility of Item 601(b)(18) given the small number of 
preferability letters filed and whether the small number of 
preferability letters reflects decreased utility and importance of this 
requirement or if, alternatively, these limited occurrences make this 
disclosure more valuable to investors.
c. Request for Comment
    253. Given the development of auditing and accounting standards 
over the past 40 years, including the adoption of more prescriptive 
standards such as SFAS No. 154 \804\ and AS No. 6, do preferability 
letters continue to provide incremental information to investors that 
is not otherwise available in either the auditor's opinion on the 
annual financial statements or in the notes to the interim financial 
statements? If so, is this incremental information important to 
investors and how could it be improved?
---------------------------------------------------------------------------

    \804\ See supra note 791.
---------------------------------------------------------------------------

    254. Should we revise Item 601(b)(18) to specify the language that 
must be included in a preferability letter? Is there any particular 
language that gives investors more insight into the determination that 
the change is preferable? In light of the lack of a standard for 
assessing preferability, do investors receive more information from a 
preferability letter than from an auditor's report? Does it depend on 
the nature of the change in accounting principle?
    255. Should we eliminate Item 601(b)(18) in light of the current 
requirements under U.S. GAAP and the PCAOB's auditing standards? When a 
change in accounting principle is material, is an auditor's report 
without a qualified or adverse opinion sufficient to convey the 
independent accountant's conclusion that the registrant has justified 
the change to be preferable? Would eliminating the exhibit requirement 
affect the independent accountant's analysis of whether an accounting 
change is preferable?
    256. Would it be more appropriate for the independent accountant to 
indicate in the auditor's report whether a change in accounting 
principle is to an alternative principle that in the auditor's judgment 
is preferable under the circumstances?
7. Subsidiaries and Legal Entity Identifiers
    Item 601(b)(21) requires registrants to list all of their 
subsidiaries, the state or other jurisdiction of incorporation or 
organization of each, and the names under which such subsidiaries do 
business.\805\ The names of particular subsidiaries may be omitted if 
the unnamed subsidiaries, considered in the aggregate as a single 
subsidiary, would not constitute a significant subsidiary as of the end 
of the year covered by the report.\806\
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    \805\ Item 601(b)(21)(i) of Regulation S-K [17 CFR 
229.601(b)(21)(i)].
    \806\ Item 601(b)(21)(ii) of Regulation S-K [17 CFR 
229.601(b)(21)(ii)]. This exception does not apply to banks, 
insurance companies, savings and loan associations or to any 
subsidiary subject to regulation by another Federal agency.
    The term ``significant subsidiary'' is defined by reference to 
Rule 1-02(w) of Regulation S-X [17 CFR 210.1-02(w)]. Under that 
rule, a significant subsidiary means any subsidiary that meets any 
of the following conditions: (1) The registrant's and its other 
subsidiaries' investments in and advances to the subsidiary exceed 
ten percent of the total assets of the registrant and its 
subsidiaries consolidated as of the end of the most recently 
completed fiscal year (for a proposed combination between entities 
under common control, this condition is also met when the number of 
common shares exchanged or to be exchanged by the registrant exceeds 
ten percent of its total common shares outstanding at the date the 
combination is initiated); or (2) The registrant's and its other 
subsidiaries' proportionate share of the total assets (after 
intercompany eliminations) of the subsidiary exceeds ten percent of 
the total assets of the registrants and its subsidiaries 
consolidated as of the end of the most recently completed fiscal 
year; or (3) The registrant's and its other subsidiaries' equity in 
the income from continuing operations before income taxes, 
extraordinary items and cumulative effect of a change in accounting 
principle of the subsidiary exclusive of amounts attributable to any 
noncontrolling interests exceeds ten percent of such income of the 
registrant and its subsidiaries consolidated for the most recently 
completed fiscal year. Id.
---------------------------------------------------------------------------

    A legal entity identifier (``LEI'') is a 20-character, alpha-
numeric code that connects to key reference information that allows for 
unique identification of entities engaged in financial transactions. 
Recently, the Commission has adopted rules requiring disclosure of LEIs 
in certain circumstances, if available, and in one instance the 
Commission has mandated use of

[[Page 23983]]

LEI.\807\ LEI disclosure is not required in Exchange Act reports.
---------------------------------------------------------------------------

    \807\ See infra notes 831 to 835 and accompanying text.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter recommended that 
we require disclosure of all subsidiaries instead of only significant 
subsidiaries, asserting that registrants use the Commission's 
significance test to hide material information from investors.\808\ 
This commenter also recommended requiring disclosure of additional 
information for each subsidiary, such as profits earned and number of 
employees, for investors to understand registrants' structures and 
their international strategies, on the grounds that this information is 
necessary to understand a registrant's corporate structure and tax 
strategy.
---------------------------------------------------------------------------

    \808\ See US SIF 1.
---------------------------------------------------------------------------

    Another commenter recommended requiring registrants to disclose 
each country of operation and the name of each entity domiciled in each 
country of operation; the number of employees physically working in 
each country of operation; the total pre-tax gross revenue of each 
entity in each country of operation; and the total amount of payments 
made to governments by each entity in each country of operation.\809\ 
This commenter stated that investors have an interest in understanding 
how much of a registrant's profits are generated from business 
operations and how much is a function of tax strategies. This commenter 
added that a registrant's filings should explain to investors the tax 
liabilities it incurred for the year, how much it paid, and where. 
While not addressing Item 601(b)(21) specifically, one commenter 
recommended revising the test for determining whether a subsidiary is a 
significant subsidiary by replacing the existing pre-tax income, 
investment and asset test with a revenue test and a fair value 
test.\810\
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    \809\ See AFL-CIO.
    \810\ See ABA 1 (stating that, compared to existing tests, 
revenue and fair value-based tests are more reliable indicators of 
the significance of a tested entity to the registrant, easier to 
calculate and calculated using more consistently measured amounts 
that are not affected by different bases of accounting). See also 
supra note 806.
---------------------------------------------------------------------------

    We received two comment letters addressing LEIs.\811\ One of these 
commenters recommended the Commission consider ``a commitment to 
adopt'' the LEI endorsed by the G20 as an ``authoritative, unique, and 
common identifier for entities subject to financial regulators, 
throughout existing forms.'' \812\ This commenter specified that a 
registrant's list of subsidiaries would be more useful to investors if 
the Commission required issuers to disclose each subsidiary's LEI. The 
other commenter recommended the Commission move away from ``proprietary 
identifiers such as the CUSIP and toward an open source identifier such 
as the Legal Entity Identifier'' stating this ``will make it easier for 
investors to connect other datasets with structured data from the 
Commission.'' \813\
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    \811\ See Data Transparency Coalition and letter from TagniFi, 
LLC (Jan. 27, 2016) (``TagniFi'').
    \812\ See Data Transparency Coalition (noting that the 
``Commission has already proposed requiring the LEI to be included 
in security-based swap reports where available, but has not yet 
committed to use the LEI in its corporate disclosure system'' and 
that the ``Commission should incorporate commonly-used data fields 
wherever applicable, starting with the LEI . . .'').
    \813\ See TagniFi.
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b. Subsidiaries
i. Discussion
    Before the adoption of Regulation S-K, Form 10-K required 
registrants to disclose a list or diagram of all parents and 
subsidiaries of the registrant in the text of the annual report.\814\ 
In addition, for each entity identified, registrants were required to 
disclose the percentage of voting securities owned or other bases for 
control by the immediate parent.\815\ Registrants were permitted to 
omit the names of particular subsidiaries if those subsidiaries, 
considered in the aggregate as a single subsidiary, would not 
constitute a significant subsidiary.\816\ In 1970, the Commission 
revised Form 10-K to permit registrants to omit the names of certain 
consolidated wholly-owned multiple subsidiaries carrying on the same 
line of business.\817\ This exclusion was similar to one recommended in 
the Wheat Report.\818\
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    \814\ See, e.g., 1965 Amendments to Form 10-K Adopting Release.
    Item 1(a) of former 10-K required disclosure of subsidiaries of 
``material significance in relation to the total enterprise 
represented by the registrant and its subsidiaries, in respect of 
either (1) the investment in and advances to such subsidiary, or (2) 
the sales or operating revenues of such subsidiary, or (3) the 
essential nature of the function performed by such subsidiary in the 
total enterprise represented by the registrant and its 
subsidiaries.'' The item also required certain disclosures of 
omitted subsidiaries such as the number of subsidiaries omitted and 
the total investment of the registrant in such omitted subsidiaries. 
Id.
    \815\ This disclosure was required under Item 3 of prior Form 
10-K. See 1965 Amendments to Form 10-K Adopting Release.
    \816\ See, e.g., 1965 Amendments to Form 10-K Adopting Release. 
The item requirement did not define the term ``significant 
subsidiary.'' Registrants were also required to indicate (i) 
subsidiaries for which separate financial statements are filed; (ii) 
subsidiaries included in the respective consolidated financial 
statements; (iii) subsidiaries included in the respective group 
financial statements filed for unconsolidated subsidiaries; and (iv) 
other subsidiaries, indicating briefly why statements of such 
subsidiaries are not filed. Id.
    \817\ See 1970 Revised Form 10-K Adopting Release. Current Item 
601(b)(21)(ii) contains substantially the same exception, permitting 
the omission of consolidated wholly-owned multiple subsidiaries 
carrying on the same line of business, such as chain stores or small 
loan companies, provided the name of the immediate parent, the line 
of business, the number of omitted subsidiaries operating in the 
United States and the number operating in foreign countries are 
given.
    \818\ See Wheat Report at Appendix X-3 (recommending that the 
names of consolidated totally-held subsidiaries may be omitted on a 
Form 10-K, provided that the number of such subsidiaries shall be 
given together with an explanation of the basis for omission of 
names).
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    With the adoption of the integrated disclosure system, the 
Commission replaced the Form 10-K subsidiary disclosure requirement 
with a less-detailed requirement to file as an exhibit a list of 
subsidiaries and each subsidiary's jurisdiction of incorporation or 
organization.\819\ This change was based on the Sommer Report which 
recommended that Form 10-K contain only a ``list of all subsidiaries,'' 
as opposed to the additional disclosure requirements mentioned above, 
such as the bases for control of each subsidiary.\820\ In the adopting 
release, the Commission also noted that, although a few commenters 
stated that no such exhibit relating to subsidiaries, in any form, 
should be required, most commenters did not object to the exhibit 
requirement if insignificant subsidiaries were not required to be 
disclosed.\821\ The Commission agreed with the commenters that listing 
all subsidiaries would be too burdensome and adopted the exhibit 
requiring only the names of significant subsidiaries.\822\ In 1982, the 
Commission amended the item to allow registrants to incorporate by 
reference their lists of subsidiaries if an accurate and complete list 
is contained in a document previously filed with the Commission.\823\
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    \819\ See 1980 Form 10-K Adopting Release.
    \820\ See 1980 Form 10-K Proposing Release. The Commission also 
stated that after consideration, it had determined that the value of 
parent and subsidiary data is not sufficient to warrant its 
inclusion in Form 10-K itself. In addition, it noted its belief that 
occasional references to such data may be useful. Accordingly, the 
Commission proposed a new exhibit requirement rather than including 
this disclosure in Form 10-K itself. See id.
    \821\ See 1980 Form 10-K Adopting Release.
    \822\ See id.
    \823\ See 1982 Integrated Disclosure Adopting Release.
---------------------------------------------------------------------------

    Disclosure provided under Item 601(b)(21) has decreased in the last 
several years. Specifically, the average number of subsidiaries 
reported by

[[Page 23984]]

registrants under Item 601(b)(21) is estimated to have decreased 
approximately twenty percent in the five years from 2009 to 2014. 
However, this decrease is roughly equivalent to the increase observed 
in the previous five years, from 2004 to 2009.\824\ According to one 
press report, in recent years certain large registrants have reduced 
the number of subsidiaries listed pursuant to Item 601(b)(21) by 
omitting subsidiaries that are not significant.\825\ While omission of 
insignificant subsidiaries from the exhibit is permitted under Item 
601(b)(21), the report suggested such registrants may be seeking to 
avoid disclosing subsidiaries located in countries regarded as tax 
havens at a time when government officials and academics are 
scrutinizing the use of offshore tax havens.\826\ We are interested in 
commenters' views on the impact of the rule's exclusion for 
insignificant subsidiaries.
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    \824\ These estimates are based on DERA staff analysis of Item 
601(b)(21) data collected using text analysis techniques by academic 
researchers. The estimates represent approximations and may be 
affected by, among other things, the limitations of text analysis 
and sample composition changes over this time frame. The data is 
available at https://sites.google.com/site/scottdyreng/Home/data-and-code. For more information about this dataset, see S. Dyreng and 
B. Lindsey, Using Financial Accounting Data to Examine the Effect of 
Foreign Operations Located in Tax Havens and Other Countries on U.S. 
Multinational Firms' Tax Rates, 47 J. Acct. Res. 1283, 1283-1316 
(2009); and S. Dyreng, B. Lindsey and J. Thornock, Exploring the 
Role Delaware Plays as a Domestic Tax Haven, 108 J. Fin. Econ. 751, 
751-772 (2013).
    \825\ See Jessica Holzer, From Google to FedEx: The Incredible 
Vanishing Subsidiary, The Wall Street Journal, May 22, 2013, 
available at https://www.wsj.com/articles/SB10001424127887323463704578497290099032374 (noting the number of 
subsidiaries disclosed has declined from over 100 subsidiaries to 
single digits among certain large registrants).
    \826\ Id. See also U.S. PIRG Education Fund and Citizens for Tax 
Justice, Offshore Shell Games 2015, The Use of Offshore Tax Havens 
by Fortune 500 Companies, Oct. 2015, available at https://ctj.org/pdf/offshoreshell2015.pdf (stating that, based on information in 
Exhibit 21 to Form 10-K, 358 of Fortune 500 companies operated 
subsidiaries in tax haven jurisdictions at the end of 2014 and 
noting that ``it is possible that many of the remaining 142 
companies simply do not disclose their offshore tax haven 
subsidiaries''); and United States Government Accountability Office, 
International Taxation, Large U.S. Corporations and Federal 
Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens 
or Financial Privacy Jurisdictions, Report to Congressional 
Requestors, Dec. 2008, available at https://www.gao.gov/assets/290/284522.pdf (concluding that 83 of the 100 largest publicly traded 
U.S. corporations in terms of 2007 revenue reported having 
subsidiaries in jurisdictions listed as tax havens or financial 
privacy jurisdictions. Findings were based on information filed in 
Exhibit 21 to Form 10-K, and the report notes that the findings may 
be understated because ``the SEC only requires public companies to 
report significant subsidiaries . . .'').
---------------------------------------------------------------------------

ii. Request for Comment
    257. Should we revise Item 601(b)(21) to eliminate the exclusions 
and require registrants to disclose all subsidiaries? What would be the 
benefits and challenges associated with this alternative?
    258. Should we expand the exhibit requirement to include additional 
disclosure about the registrant's subsidiaries? What additional 
information would be important to investors and why?
    259. Should we require registrants to include an organization or 
corporate structure chart or similar graphic depicting their 
subsidiaries and their basis of control? How could such a graphic 
facilitate investors' understanding of a registrant's corporate 
structure? Should we require this chart or graphic as an exhibit or in 
the text of the annual report? What would be the challenges associated 
with this approach?
    260. For purposes of identifying which subsidiaries a registrant 
may omit from the exhibit, Item 601(b)(21) relies on the definition of 
``significant subsidiary'' in Rule 1-02(w) of Regulation S-X. Does this 
definition appropriately exclude subsidiaries that are not important to 
investors? Does it exclude any subsidiaries that should be included? 
Should we consider a different definition or test for excluding certain 
subsidiaries from the exhibit? If so, what factors should we consider?
c. Legal Entity Identifiers
i. Discussion
    While there are currently many ways to identify entities, there is 
no unified global identification system for legal entities across 
markets and jurisdictions. The LEI is a reference code to uniquely 
identify a legally distinct entity that engages in a financial 
transaction.\827\ It is based on an international standard published by 
the International Organization for Standardization in June 2012.\828\ 
Efforts to expand the use of a universal LEI have progressed 
significantly over the last few years.\829\
---------------------------------------------------------------------------

    \827\ For further information about LEIs, see Frequently Asked 
Questions: Global Legal Entity Identifier (LEI), Aug. 2012 available 
at https://www.treasury.gov/initiatives/wsr/ofr/Documents/LEI_FAQs_August2012_FINAL.pdf.
    \828\ See International Organization for Standardization, 
Financial Services--Legal Entity Identifier, 2012, Reference No. ISO 
17442-2012(E).
    \829\ See, e.g., The Global LEI System and regulatory uses of 
the LEI, Nov. 5, 2015, available at https://www.leiroc.org/publications/gls/lou_20151105-1.pdf (progress report by the Legal 
Identifier Regulatory Oversight Committee, including an annex 
listing regulatory actions in the United States, the EU countries, 
and eight other countries which require, request, or allow the use 
of LEIs). The global LEI system currently has over 419,000 
registrations and is growing. See the Global LEI Foundation daily 
updated ``concatenated file,'' which includes all LEIs issued 
globally and related LEI reference data, available at https://www.gleif.org/en/lei-data/gleif-concatenated-file/lei-download# or 
https://openleis.com.
---------------------------------------------------------------------------

    Obtaining an LEI entails both initial registration and annual 
maintenance fees and is done through local operating utilities such as 
the Global Market Entity Identifier utility in the United States.\830\ 
Fees are not imposed to use or access LEIs, and all of the associated 
reference data needed to understand, process, and utilize the LEIs is 
widely and freely available.
---------------------------------------------------------------------------

    \830\ As of December 7, 2015, the cost of obtaining an LEI from 
the Global Markets Entity Identifier (``GMEI'') Utility in the 
United States was $200, plus a $19 per record surcharge for the LEI 
Central Operating Unit. The annual cost of maintaining an LEI from 
the GMEI Utility was $100, plus a $19 surcharge for the LEI Central 
Operating Unit. See https://www.gmeiutility.org/frequentlyAskedQuestions.jsp.
---------------------------------------------------------------------------

    In recent rulemakings, the Commission has prescribed disclosure of 
LEI, if available, for parties to certain financial transactions. For 
example, the Commission recently prescribed disclosure of an obligor's 
LEI, if available, with respect to a rating action involving a credit 
rating of an obligor as an entity.\831\ In doing so, it stated that use 
of an LEI can promote accuracy and standardization of NRSRO data and 
therefore can further the purpose of allowing users of credit ratings 
to compare the performance of credit ratings by different NRSROs.\832\ 
As another example, the Commission recently adopted an LEI disclosure 
requirement related to credit risk retention for open market 
collateralized loan obligations (``CLOs''), if an LEI has been obtained 
by the obligor, stating that this requirement would allow investors to 
better track the performance of assets originated by specific 
originators.\833\ While these recent

[[Page 23985]]

rulemakings have required LEI disclosure only if available, the 
Commission has mandated use of LEI in the context of security-based 
swap transactions \834\ and has proposed mandatory use of LEI in 
investment company reporting.\835\ To the extent that LEIs become more 
widely used by regulators and the financial industry, they could 
potentially facilitate investor and Commission use of registrant data 
by showing networks of control, ownership, liability and risks.
---------------------------------------------------------------------------

    \831\ See Nationally Recognized Statistical Rating 
Organizations, Release No. 34-72936 (Aug. 27, 2014) [79 FR 55077 
(Sept. 15, 2014)] (``2014 NRSRO Amendments Release''). The 
Commission revised Exchange Act Rule 17g-7 to require that NRSROs, 
taking rating action with respect to certain obligors or issuers, 
disclose the LEI issued by a utility endorsed or otherwise governed 
by the Global LEI Regulatory Oversight Committee or the Global LEI 
Foundation of the obligor or issuer, if available, or, if an LEI is 
not available, the Central Index Key (CIK) number of the obligor or 
issuer, if available. Id. See also Rule 17g-7(b)(2)(iii)(A) and 
(iv)(A) [17 CFR 240.17g-7].
    \832\ See 2014 NRSRO Amendments Release. The Commission also 
stated that coded identifiers like LEI and CIK will add a level of 
standardization to the credit rating history data, making for easier 
electronic querying and processing. Id.
    \833\ See Credit Risk Retention, Release No. 34-73407 (Oct. 22, 
2014) [79 FR 77601 (Dec. 24, 2014)]. Under the final rule's lead 
arranger option for open market CLOs, the sponsor is required to 
disclose a complete list of every asset held by an open market CLO 
(or before the CLO's closing, in a warehouse facility in 
anticipation of transfer into the CLO at closing). This list 
requires, among other things, the full legal name, Standard 
Industrial Classification category code and LEI (if an LEI has been 
obtained by the obligor) of the obligor of the loan or asset. [24 
CFR 267.9].
    \834\ See Regulation SBSR-Reporting and Dissemination of 
Security-Based Swap Information, Release No. 34-74244 (Feb. 11, 
2015) [80 FR 14563 (Mar. 19, 2015)] (``2015 Regulation SBSR 
Release'').
    \835\ In connection with our efforts to modernize reporting and 
disclosure by registered investment companies, the Commission 
proposed new Form N-PORT in May of 2015. Form N-PORT would require 
certain registered investment companies to report information about 
their monthly portfolio holdings in a structured data format. We 
proposed inclusion of LEIs in Part A of Form N-PORT and stated that 
inclusion of this information would facilitate the ability of 
investors and the Commission to link the data reported on Form N-
PORT with data from other filings or sources that is or will be 
reported elsewhere as LEIs become more widely used by regulators and 
the financial industry. See Investment Company Reporting 
Modernization, Release No. 33-9776 (May 20, 2015) [80 FR 33589 (June 
12, 2015)] (``2015 Investment Company Release'') at notes 40-43 and 
accompanying text.
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ii. Request for Comment
    261. Should we require registrants to disclose their LEI and the 
LEIs of their subsidiaries (if available) in the list of subsidiaries 
filed under Item 601(b)(21)? How would this information benefit 
investors? Should the industry in which the company operates or the 
extent to which the company engages in financial market transactions 
affect whether disclosure of LEIs is required? What would be the costs 
of requiring disclosure of this information?
    262. Should our rules encourage registrants to obtain an LEI? If 
so, how could we structure our rules, consistent with our authority 
under the Securities Act and the Exchange Act, to achieve this purpose? 
For example, should we make obtaining and maintaining an LEI a 
condition to any of our existing disclosure accommodations or 
alternatives? Why or why not? If so, should such a condition be limited 
to certain types of registrants, such as those operating in financial 
services? For registrants that have not obtained an LEI, will these 
registrants seek to obtain an LEI in the future absent any regulatory 
incentive to do so? In addition to the fees for obtaining and 
maintaining an LEI, would there be other costs associated with 
obtaining LEIs?
    263. Some registrants may have hundreds or thousands of 
subsidiaries or affiliates operating globally while other registrants 
have simple corporate structures. If we required registrants to 
disclose LEIs (if available) in the list of significant subsidiaries, 
should we limit the requirement to larger registrants or larger 
subsidiaries, independent of the industry in which the registrant 
operates? For example, should we limit the requirement to large 
accelerated filers or well-known seasoned issuers (WKSIs)?

H. Scaled Requirements

1. Categories of Registrants Eligible for Scaled Disclosure
    Over the years, the Commission has developed a disclosure system 
that provides regulatory relief in the form of reduced disclosure 
requirements for certain smaller registrants. Although initially 
developed to facilitate smaller companies' access to the capital 
markets,\836\ these reduced or scaled disclosure requirements also 
apply to annual and quarterly reports. Currently, registrants are 
eligible for scaled disclosure if they qualify as an SRC or an EGC. 
SRCs are registrants having less than $75 million in public float 
(i.e., the aggregate market value of the issuer's outstanding voting 
and non-voting common equity held by non-affiliates) or, if public 
float is zero, less than $50 million in annual revenue in the last 
fiscal year.\837\
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    \836\ See Small Business Initiatives Adopting Release and Form 
S-18 Release.
    \837\ Item 10(f) of Regulation S-K [17 CFR 229.10(f)].
---------------------------------------------------------------------------

    In 2012, Title I of the JOBS Act created a new category of issuer 
called an ``emerging growth company.'' Like SRCs, EGCs are eligible for 
a variety of accommodations, including scaled disclosure 
requirements.\838\ A company qualifies as an EGC if it did not complete 
its first registered sale of common equity securities on or before 
December 8, 2011 and has total annual gross revenues of less than $1 
billion during its most recently completed fiscal year.\839\ A company 
retains EGC status until the earliest of the following:
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    \838\ Public Law 112-106, Secs. 102-104, 126 Stat. 306 (2012). 
For a discussion of the scaled disclosure accommodations available 
to SRCs and EGCs, see Section IV.H.2.
    \839\ Public Law 112-106, Sec. 101, 126 Stat. 306 (2012); 15 
U.S.C. 77b(a)(19); 15 U.S.C. 78c(a)(80).
---------------------------------------------------------------------------

     The last day of its fiscal year during which its total 
annual gross revenues are $1 billion or more;
     the date it is deemed to be a large accelerated filer 
under the Commission's rules;
     the date on which it has issued more than $1 billion in 
non-convertible debt in the previous three years; or
     the last day of the fiscal year following the fifth 
anniversary of the first registered sale of common equity securities of 
the issuer.\840\
---------------------------------------------------------------------------

    \840\ Id. In addition, the FAST Act amended Securities Act 
Section 6(e)(1) [15 U.S.C. 77 f(e)(1)] to provide a grace period for 
EGCs at risk of losing their status as an EGC after the initial 
filing or confidential submission of their IPO registration 
statement but before the IPO is completed. Such companies shall 
continue to be treated as an EGC through the earlier of the 
consummation of the IPO or one year after they would otherwise cease 
to be an EGC. See Public Law 114-94, Sec. 71002, 129 Stat. 1312 
(2015).
---------------------------------------------------------------------------

    The Commission has specified other categories of registrants for 
different purposes. These include: Accelerated filers, with a public 
float of $75 million or more but less than $700 million; and large 
accelerated filers, with a public float of $700 million or more.\841\ A 
filer with a public float of less than $75 million is a ``non-
accelerated filer.'' \842\
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    \841\ Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. Under Rule 
12b-2, accelerated filers and large accelerated filers must also 
have been subject to the requirements of Exchange Act Section 13(a) 
or 15(d) for at least 12 months and must not be eligible to use the 
SRC requirements under Regulation S-K for its annual and quarterly 
reports. Id. See also Revisions to Accelerated Filer Definition and 
Accelerated Deadlines for Filing Periodic Reports, Release No. 33-
8644 (Dec. 21, 2005) [70 FR 76626 (Dec. 27, 2005)] (``2005 
Accelerated Filer Revisions Release'').
    \842\ See 2005 Accelerated Filer Revisions Release. While a 
``non-accelerated filer'' is not defined in Exchange Act Rule 12b-2, 
it represents a category of filer that, among other things, has a 
different deadline for filing periodic reports.
---------------------------------------------------------------------------

    These categories determine periodic reporting schedules.\843\ They 
also determine the age requirements for financial statements under 
Regulation S-X \844\ and certain requirements for audits of internal 
control over financial reporting (``ICFR'') under Item 308 of 
Regulation S-K.\845\ In addition, accelerated and large accelerated 
filers are subject to other disclosure requirements, such as the 
requirements to disclose their Internet address,\846\ information about 
how they make their periodic reports available,\847\ and a description 
of any open unresolved staff

[[Page 23986]]

comments on their periodic or current reports.\848\
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    \843\ See 2005 Accelerated Filer Revisions Release.
    \844\ Rule 3-01 of Regulation S-X [17 CFR 210.3-01].
    \845\ Item 308 of Regulation S-K [17 CFR 229.308].
    \846\ Item 101(e)(3) of Regulation S-K [17 CFR 229.101(e)(3)].
    \847\ Item 101(e)(4) of Regulation S-K [17 CFR 229.101(e)(4)].
    \848\ Item 1B of Part I of Form 10-K.
---------------------------------------------------------------------------

    The following table summarizes the criteria for determining whether 
a company qualifies as an EGC, SRC, non-accelerated filer, accelerated 
filer or large accelerated filer.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Public float to  re-
                                    Public float \849\    Revenues \850\ to enter     Criteria to exit    enter status  (after    Revenues to re-enter
        Category of filer             to enter status              status                  status               exceeding        status (after exceeding
                                                                                                              threshold(s))           threshold(s))
--------------------------------------------------------------------------------------------------------------------------------------------------------
EGC..............................  N/A.................  <$1 billion..............   Revenues     N/A.................  N/A.
                                                                                     >=$1 billion.
                                                                                     5th
                                                                                     anniversary of IPO
                                                                                     \851\.
                                                                                     Non-
                                                                                     convertible debt
                                                                                     >$1 billion \852\.
                                                                                     Float
                                                                                     >=$700 million
                                                                                     \853\.
SRC..............................  <$75 million........  <$50 million \854\.......  Float >=$75 million.  <$50 million \855\..  <$40 million.\856\
Non-Accelerated Filer............  <$75 million........  N/A......................  Float >=$75 million.  <$50 million \857\..  N/A.
Accelerated Filer................  >=$75 million but     N/A......................  Float <$75 million    <$500 million but     N/A.
                                    <$700 million.                                   or >=$700 million.    >=$50 million \858\.
Large Accelerated Filer..........  >=$700 million......  N/A......................  Float <$700 million.  N/A.................  N/A.
--------------------------------------------------------------------------------------------------------------------------------------------------------

a. Comments Received
---------------------------------------------------------------------------

    \849\ Public float is computed as of the last business day of 
company's most recently completed second fiscal quarter. Item 10(f) 
of Regulation S-K [17 CFR 229.10(f)].
    \850\ Revenues are as reported in a company's most recently 
completed fiscal year. [15 U.S.C. 78c(a)(80)]; Exchange Act Rule 
12b-2 [17 CFR 240.12b-2]; Item 10(f) of Regulation S-K [17 CFR 
229.10(f)].
    \851\ Ineligibility begins on the last day of the fiscal year in 
which the fifth anniversary occurs. [15 U.S.C. 78c(a)(80)]. The 
Division has interpreted the phrase ``first sale of common equity 
securities'' under the JOBS Act (``IPO'' in the table above) not to 
be limited to a company's initial primary offering of common equity 
securities for cash. It could also include offering common equity 
pursuant to an employee benefit plan on a Form S-8 as well as a 
selling shareholder's secondary offering on a resale registration 
statement. See Jumpstart Our Business Startups Act Frequently Asked 
Questions, Generally Applicable Questions on Title I of the JOBS 
Act, Question 2 (Apr. 28, 2012), available at https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
    \852\ Ineligibility begins on the date on which the company has 
issued more than $1 billion in non-convertible debt during the 
previous three year period. [15 U.S.C. 78c(a)(80)].
    \853\ See supra note 840.
    \854\ Revenue test applies only if public float is zero. Item 
10(f)(1)(iii) of Regulation S-K [17 CFR 229.10(f)(1)(iii)].
    \855\ Once a registrant fails to qualify as an SRC, it will 
remain unqualified unless its public float falls below $50 million 
as of the last business day of its second fiscal quarter, or if 
public float is zero, if revenues fall below $40 million during its 
previous fiscal year. Item 10(f)(2)(iii) of Regulation S-K [17 CFR 
229.10(f)(2)(iii)].
    \856\ Id.
    \857\ Once a registrant becomes an accelerated filer, it will 
remain an accelerated filer unless it determines at the end of a 
fiscal year that its public float was less than $50 million as of 
the last business day of it most recently completed second fiscal 
quarter. The registrant will not become an accelerated filer again 
unless it subsequently meets the conditions for initial 
qualification as an accelerated filer. Rule 12b-2 of the Exchange 
Act [17 CFR 240.12b-2].
    \858\ Once a registrant becomes a large accelerated filer, it 
will remain a large accelerated filer unless it determines at the 
end of a fiscal year that its public float was less than $500 
million as of the last business day of it most recently completed 
second fiscal quarter. The registrant will not become a large 
accelerated filer again unless it subsequently meets the conditions 
for initial qualification as a large accelerated filer. Id.
---------------------------------------------------------------------------

    S-K Study. One commenter noted that the $1 billion threshold for 
EGCs established in the JOBS Act appeared to be arbitrary and opposed 
any potential Commission guidance broadening the definition of EGCs, 
because it would unnecessarily increase the risks to investors.\859\ 
Two commenters suggested that the Commission should modify Regulation 
S-K to apply to different classes of EGCs, such as those that reach 
specified revenue levels lower than $1 billion, or to phase in 
different requirements after a certain period of time following the 
IPO.\860\
---------------------------------------------------------------------------

    \859\ See letter from Council of Institutional Investors (Aug. 
9, 2012) (``CII'').
    \860\ See Silicon Valley and M. Liles.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. One commenter suggested that 
overreliance on public float to define SRCs and non-accelerated filers 
creates a compliance burden for companies with high valuations that 
would be considered ``small'' by any ``reasonable observer.'' \861\ 
This commenter recommended revising the definition of SRC and non-
accelerated filer to include any issuer with public float below $250 
million, or annual revenues below $100 million regardless of its public 
float, to avoid grouping highly valued small companies with little or 
no revenue with larger corporations.
---------------------------------------------------------------------------

    \861\ See Biotech Industry Organization.
---------------------------------------------------------------------------

b. Discussion
    The Commission's practice of providing disclosure accommodations to 
smaller companies with less established trading markets dates back to 
1979. In providing these accommodations and determining what categories 
of registrants are eligible for scaled disclosure requirements, the 
Commission has sought to promote capital formation and reduce 
compliance costs while maintaining investor protections.\862\
---------------------------------------------------------------------------

    \862\ See, e.g., Form S-18 Release; and Small Business 
Initiatives, Release No. 33-6924 (Mar. 11, 1992) [57 FR 9768 (Mar. 
20, 1992)] (``Small Business Initiatives Proposing Release'').
---------------------------------------------------------------------------

    Our current system of reporting and registration for SRCs is based 
on Form S-18, which allowed an entity that was not previously a 
reporting company to raise a limited amount of capital without 
immediately incurring the full range of disclosure and reporting 
obligations required of other issuers.\863\ As part of a larger effort 
to facilitate capital raising by small businesses and reduce the 
compliance burdens placed on these companies by the federal securities 
laws, the Commission created Regulation S-B in 1992 and rescinded

[[Page 23987]]

Form S-18.\864\ Regulation S-B was a new integrated disclosure system 
modeled after Form S-18 and specifically tailored to ``small business 
issuers,'' which it defined as registrants with annual revenues of less 
than $25 million whose voting stock had a public float of less than $25 
million.
---------------------------------------------------------------------------

    \863\ See Small Business Initiatives Adopting Release and Form 
S-18 Release. Form S-18 was ``in the nature of an experiment'' for 
use by certain non-reporting issuers seeking to register certain 
offerings of less than $5 million. Registrants using Form S-18 were 
permitted to provide narrative disclosure somewhat less extensive 
than Form S-1 and audited financial statements for two fiscal years 
instead of the three fiscal years required in Form S-1. In addition, 
and to help reduce the expenses resulting from registration and 
reporting under the Securities Act and the Exchange Act, the 
Commission allowed Form S-18 registrants to include this scaled 
narrative and financial disclosure in their initial Form 10-K. See 
Form S-18 Release. See also Section III.A.2.b for a discussion of 
Form S-18.
    Notably, while Form S-18 was intended to facilitate a small 
business's access to public capital markets, eligibility to use the 
form was not determined by the size of the issuer. After observing 
the form's use, the Commission later expanded the availability of 
Form S-18. See supra note 78. The offering threshold was raised to 
$7.5 million in 1983. See Revisions to Optional Form S-18, Release 
No. 33-6489 (Sept. 23, 1983) [48 FR 45386 (Oct. 5, 1983)].
    \864\ See Small Business Initiatives Adopting Release. In 
addition to the small business integrated disclosure system and 
forms, the Commission revised Regulation A to, among other things, 
raise the dollar limit to $5 million in a 12-month period and 
revised Rule 504 to, among other things, allow for receipt of freely 
transferable securities and remove the proscription on general 
solicitation. Id.
---------------------------------------------------------------------------

    In 2007, the Commission replaced the ``small business issuer'' 
definition with the current definition for ``smaller reporting 
companies,'' which expanded the universe of registrants eligible for 
scaled disclosure.\865\ Unlike the dual eligibility test under 
Regulation S-B, which required separate calculations using both public 
float and annual revenues, the 2007 definition, which remains in effect 
today, eliminated the revenue test for most companies.\866\ The 
Commission stated its belief that this would simplify and streamline 
the definition while expanding the number of companies eligible to 
qualify. The majority of commenters also supported a revenue test only 
if a company is unable to calculate public float.
---------------------------------------------------------------------------

    \865\ See SRC Adopting Release. Several of the amendments the 
Commission adopted in the SRC Adopting Release originated in 
recommendations made by the Advisory Committee on Smaller Public 
Companies (ACSPC), which the Commission chartered in 2005 to assess 
the regulatory system for smaller companies. The ACSPC's 
recommendations included establishing a system of scaled securities 
regulation for ``smaller public companies,'' which referred to 
registrants in the lowest six percent of total U.S. equity market 
capitalizations, and included: ``microcap companies'' which referred 
to registrants in the lowest one percent of total U.S. equity market 
capitalization and would have included registrants with 
capitalizations below approximately $128 million; and ``smallcap 
companies,'' which referred to registrants in the next lowest five 
percent of total U.S. equity market capitalization and would have 
included registrants with capitalizations between approximately $128 
million and $787 million. See Final Report of the Advisory Committee 
on Smaller Public Companies to the U.S. Securities and Exchange 
Commission, Apr. 23, 2006, available at https://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf.
    \866\ See SRC Adopting Release.
---------------------------------------------------------------------------

    Recently, we have received recommendations to revisit some of our 
registrant categories eligible for scaled disclosure, with particular 
focus on expanding the SRC definition to include a greater number of 
registrants.\867\ In the S-K Study, the staff recommended consideration 
of the criteria used to determine eligibility for potential further 
scaling of disclosure requirements and, in particular, whether it would 
be appropriate to scale for companies other than EGCs. The staff also 
noted that any determination of which companies should be allowed to 
scale their disclosures, how companies should migrate to a standard 
disclosure regime as they mature, and the extent to which disclosure of 
previously undisclosed information should later be required should 
reflect the overarching economic principles recommended in the S-K 
Study. The staff further recommended consideration of the eligibility 
criteria for SRCs, as well as the criteria for accelerated filers and 
large accelerated filers.\868\
---------------------------------------------------------------------------

    \867\ The Annual SEC Government-Business Forum on Small Business 
Capital Formation (``Small Business Forum'') has recommended 
revising the SRC definition to include a company with a public float 
of less than $250 million or a company with a public float of less 
than $700 million with annual revenues of less than $100 million. 
See e.g., Final Report of the 2014 SEC Government-Business Forum on 
Small Business Capital Formation, May 2015 (``2014 Forum Report''), 
available at https://www.sec.gov/info/smallbus/gbfor33.pdf.
    Similarly, the Commission's Advisory Committee on Small and 
Emerging Companies (``ACSEC'') recommended the Commission revise the 
SRC definition to include companies with a public float of up to 
$250 million to extend regulatory relief to a broader range of 
smaller public companies, including, among other things, the 
exemption from the requirement to provide an auditor attestation of 
the registrant's ICFR. Item 308(b) of Regulation S-K [17 CFR 
229.308(b)]. Item 308(b) applies to accelerated filers and large 
accelerated filers, both of which definitions exclude issuers that 
that are eligible to use the SRC requirements in Regulation S-K. 
Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. Because the definitions 
of accelerated filer and larger accelerated filer specify that they 
do not include registrants that are eligible to use the requirements 
for SRCs for their annual and quarterly reports, a change to the 
threshold for SRCs would extend this exemption even without a 
corresponding change to the threshold for accelerated filers.
    The ACSEC also has recommended the Commission revise the 
definition of ``accelerated filer'' to include companies with a 
public float of $250 million or more, but less than $700 million, 
thereby exempting companies with public float between $75 million 
and $250 million from the requirement to provide an auditor 
attestation of the registrant's ICFR. See e.g., Advisory Committee 
on Small and Emerging Companies Recommendations about Expanding 
Simplified Disclosure for Smaller Issuers, Sept. 23, 2015 (``2015 
ACSEC Recommendations''), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-expanding-simplified-disclosure-for-smaller-issuers.pdf.
    \868\ See S-K Study at 98 and 102-103. For a discussion of the 
overarching economic principles of the S-K Study, see Section II.C.
---------------------------------------------------------------------------

    We are interested in receiving input on how we should approach the 
eligibility criteria for using scaled disclosure. The FAST Act requires 
the Commission to revise Regulation S-K to further scale or eliminate 
disclosure requirements to reduce the burden on a variety of smaller 
issuers, including SRCs.\869\ In response to this mandate, the staff is 
currently evaluating, among other things, the criteria to qualify as an 
SRC, and expects to make recommendations to the Commission. 
Consequently, we are not addressing the existing criteria in this 
release.
---------------------------------------------------------------------------

    \869\ Public Law 114-94, Sec. 72002(1), 129 Stat. 1312 (2015).
---------------------------------------------------------------------------

c. Request for Comment
    264. In the context of registered offerings, the Commission has 
determined that certain types of issuers are unsuited for short-form 
registration or disclosure-related relief.\870\ These issuers include 
reporting companies that are not current in their Exchange Act reports, 
issuers that may raise greater potential for abuse (such as blank check 
and shell companies) \871\ and issuers that have violated the anti-
fraud provisions of the federal securities laws. Are there types of 
registrants that would meet the current criteria for scaled disclosure 
but are unsuited for providing such disclosure? If so, which issuers 
and why? Should we exclude certain types of registrants from the use of 
scaled disclosure and if so, what should be the criteria (e.g., failure 
to timely file, subject to enforcement actions for disclosure 
violations or fraud, being an ``ineligible issuer'' as defined under 
Rule 405 of the Securities Act or disqualified under Regulation A or 
Regulation D) and the time period of exclusion?
---------------------------------------------------------------------------

    \870\ See Securities Offering Reform Release.
    \871\ See id., citing Penny Stock Definition for Purposes of 
Blank Check Rule, Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099] 
(the Commission stated that Congress found blank check companies to 
be common vehicles for fraud and manipulation in the penny stock 
market, and concluded that the Commission's disclosure-based 
regulation and review of such offerings protects investors).
---------------------------------------------------------------------------

    265. Should we tie eligibility for scaled disclosure to a certain 
proportion of companies, such as companies in the lowest one percent of 
total U.S. market capitalization or the lowest six percent of total 
U.S. market capitalization, as previously recommended by the ACSPC? 
\872\
---------------------------------------------------------------------------

    \872\ See supra note 865.
---------------------------------------------------------------------------

    266. Should we allow one or more categories of larger companies, 
such as companies with a longer reporting history or more readily 
available public information to benefit from scaled disclosure 
requirements as a means of reducing compliance costs?
    267. The benefits of disclosure may be greater for smaller 
registrants because information asymmetries between investors and 
managers of smaller companies are typically higher than for larger, 
more seasoned companies with a large following.\873\ However, 
disclosure

[[Page 23988]]

requirements may impose disproportionate costs on smaller registrants, 
especially if these requirements impose fixed rather than variable 
costs.\874\ To what extent are the costs imposed by our disclosure 
requirements fixed costs that do not scale with the size of a 
registrant?
---------------------------------------------------------------------------

    \873\ See, e.g., R. Frankel and X. Li, Characteristics of a 
firm's information environment and the information asymmetry between 
insiders and outsiders, 37 J. Acct. Econ. 229, 229-259 (June 2004). 
See also, L. Cheng, S. Liao, and H. Zhang, The Commitment Effect 
versus Information Effect of Disclosure--Evidence from Smaller 
Reporting Companies, 88 Acct. Rev. 1239, 1239-1263 (2013).
    \874\ Empirical evidence suggests the imposition of additional 
disclosure requirements in the past has imposed disproportionate 
costs on smaller registrants relative to larger registrants. See 
supra note 169.
---------------------------------------------------------------------------

2. Scaled Disclosure Requirements for Eligible Registrants
    Registrants that qualify as an SRC or EGC are allowed to provide 
less detailed disclosure about their business operations and financial 
condition and to limit the number of periods for which disclosure is 
required.\875\ An SRC may limit the description of the development of 
its business under Item 101(h) of Regulation S-K to the last three 
years rather than the five years required of other registrants. The 
business description should include the registrant's form and year of 
organization, any bankruptcy proceedings, any material 
reclassification, merger, sale or purchase of assets outside the 
ordinary course of business and a description of the business. The 
disclosure required in the description of business for SRCs is less 
detailed than that required for other reporting companies and does not 
require information about seasonality, working capital practices, 
backlog information and certain material government contracts.\876\ The 
scaled requirements do, however, call for information not specifically 
required for other reporting companies, such as the need for government 
approval of principal products and services.\877\
---------------------------------------------------------------------------

    \875\ SRCs and EGCs may take advantage of additional scaled 
disclosure requirements and other accommodations, such as reduced 
executive compensation disclosure under Item 402(n) through (r) of 
Regulation S-K [17 CFR 229.402(n) through (r)] that we do not 
discuss in detail here, as they are beyond the scope of this 
release.
    \876\ Item 101(c)(1)(v), (vi), (viii) and (ix) of Regulation S-K 
[17 CFR 229.101(c)(1)].
    \877\ See, e.g., Item 101(h)(4)(viii) of Regulation S-K [17 CFR 
229.101(h)].
---------------------------------------------------------------------------

    SRCs also are required to provide only two years of audited 
financial statements \878\ rather than the three years required of 
other companies.\879\ To the extent a SRC presents only two years of 
financial statement information, they also are permitted under Item 303 
of Regulation S-K to provide MD&A for only these two years.\880\
---------------------------------------------------------------------------

    \878\ Rule 8-02 of Regulation S-X. [17 CFR 210.8-02].
    \879\ Article 3 of Regulation S-X requires: Audited balance 
sheets as of the end of each of the two most recent fiscal years; 
audited statements of income and cash flows for each of the three 
fiscal years preceding the date of the most recent audited balance 
sheet; and an analysis of changes in stockholders' equity for each 
period for which an income statement is required. Rules 3-01, 3-02, 
and 3-04 of Regulation S-X [17 CFR 210.3-01; 17 CFR 210.3-02; 17 CFR 
210.3.04].
    \880\ Instruction 1 to Item 303(a) of Regulation S-K [17 CFR 
229.303(a)].
---------------------------------------------------------------------------

    Not all EGCs qualify as SRCs. EGCs 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.\881\ In interpretive 
guidance, the Division has stated that in any other offering or in an 
Exchange Act annual report or registration statement, an EGC that is 
not an SRC is required to provide three years of audited financial 
statements, except the registrant is not required to include financial 
statements for any periods prior to the earliest period presented in 
its initial public offering of common equity securities.\882\ In 
addition, EGCs may take advantage of an extended transition period for 
complying with new or revised financial accounting standards.\883\
---------------------------------------------------------------------------

    \881\ Public Law 112-106, Sec. 102(b)-(c), 126 Stat. 306 (2012). 
One study, however, indicated that only fifty-nine percent of EGCs 
provided the minimum financial statement disclosures required by the 
JOBS Act and voluntarily provided more disclosure. See Ernst & Young 
LLP, The JOBS Act: 2015 Mid-Year Update, (Sept. 2015), available at 
https://www.ey.com/Publication/vwLUAssets/
JOBSAct_2015MidYear_CC0419_16September2015/$FILE/
JOBSAct_2015MidYear_CC0419_16September2015.pdf. While the JOBS Act 
permits EGCs to limit their MD&A to only those audited periods 
presented in its financial statements, Division staff has provided 
interpretive guidance that Section 102(c) does not permit an EGC to 
comply with the SRC provisions of Item 303. An EGC that is not an 
SRC is therefore required to include the contractual obligations 
table required by Item 303(a)(5). See Question 41, Jumpstart Our 
Business Startups Act Frequently Asked Questions, Generally 
Applicable Questions on Title I of the JOBS Act, (May 3, 2012), 
available at https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm. Additionally, a non-SRC EGC must 
provide three years of audited financial statements in an Exchange 
Act registration statement or annual report, and therefore its MD&A 
in such filing must cover the same three-year period. See Division 
of Corporation Finance Financial Reporting Manual, Section 10220.1.
    \882\ See Questions 30 and 48, Jumpstart Our Business Startups 
Act Frequently Asked Questions, Generally Applicable Questions on 
Title I of the JOBS Act, (May 3, 2012), available at https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
     Section 71003 of the FAST Act amended Section 102 of the JOBS 
Act to allow an EGC that is filing a registration statement (or 
submitting a draft registration statement for confidential review) 
under Section 6 of the Securities Act on Form S-1 or Form F-1 to 
omit financial information for historical periods otherwise required 
by Regulation S-X if it reasonably believes the omitted information 
will not be required in the filing at the time of the contemplated 
offering, so long as the issuer amends the registration statement 
prior to distributing a preliminary prospectus to include all 
financial information required by Regulation S-X at the time of the 
amendment. This provision took effect 30 days after the date of 
enactment of the FAST Act. Section 71003 also directs the Commission 
to revise the general instructions to Form S-1 and Form F-1 to 
reflect this self-executing change. In addition, Section 84001 of 
the FAST Act requires the Commission to revise Form S-1 to permit an 
SRC to incorporate by reference into its registration statement any 
documents filed by the issuer subsequent to the effective date of 
the registration statement. Public Law 114-94, Sec. 71003, 129 Stat. 
1312 (2015).
    We recently adopted interim final rules to implement Sections 
71003 and 84001 of the FAST Act. See Simplification of Disclosure 
Requirements for Emerging Growth Companies and Forward Incorporation 
by Reference on Form S-1 For Smaller Reporting Companies, Release 
No. 33-10003 (Jan. 13, 2016) [81 FR 2743 (Jan. 19, 2016)] (``FAST 
Act Interim Rules Release'').
    \883\ 15 U.S.C. 77g(a)(2)(B).
---------------------------------------------------------------------------

    SRCs are not required to provide certain line-item requirements in 
Regulation S-K, including Item 201(e) (Market price of and dividends on 
the registrant's common equity and related stockholder matters--
Performance Graph),\884\ Item 301 (Selected Financial Data),\885\ Item 
302 (Supplementary Financial Data),\886\ Item 303(a)(5) (contractual 
obligations table),\887\ Item 305 (Quantitative and Qualitative 
Disclosures about Market Risk),\888\ Item 308(b) (Internal Control over 
Financial Reporting--auditor's attestation report) \889\ and Item 
503(c) (Risk Factors).\890\ Scaled disclosure requirements under these 
items differ slightly for EGCs. For example, an EGC is permitted to 
limit the selected financial data it includes in a registration 
statement under Item 301 to those periods for which audited financial 
statements are included in the registration statement. For periodic 
reports, an EGC is not required to

[[Page 23989]]

provide the selected financial data for any periods earlier than those 
for which financial statements were presented in the IPO.\891\ EGCs are 
also not required to provide auditor attestations of ICFR and, 
accordingly, are not subject to Item 308(b).\892\
---------------------------------------------------------------------------

    \884\ Instruction 6 to Item 201(e) of Regulation S-K [17 CFR 
229.201(e)].
    \885\ Item 301(c) of Regulation S-K [17 CFR 229.301(c)].
    \886\ Item 302(c) [17 CFR 229.302(c)].
    \887\ Item 303(d) of Regulation S-K [17 CFR 229.303(d)].
    \888\ Item 305(e) of Regulation S-K [17 CFR 229.305(e)]. 
Although SRCs are not required to provide the information required 
by this item, the adopting release notes that ``if market risk 
represents a material known risk or uncertainty, [SRCs], like other 
registrants, will continue to be required to discuss those risks and 
uncertainties to the extent required by Management's Discussion and 
Analysis.'' See Disclosure of Market Risk Sensitive Instruments 
Release.
    \889\ Non-accelerated filers, a category that includes SRCs, are 
not subject to the requirements of Item 308(b) (attestation report 
of the registered public accounting firm). Item 308(b) of Regulation 
S-K [17 CFR 229.308(b)].
    \890\ Item 1A, Part I of Form 10-K and Item 1A, Part II of Form 
10-Q.
    \891\ Public Law 112-106, Sec. 102(b), 126 Stat. 306 (2012). 
Title I of the JOBS Act provided EGCs with a variety of scaled 
disclosure and other accommodations. These provisions were effective 
upon enactment of the JOBS Act without rulemaking by the Commission.
    \892\ Id. at Sec. 103 (amending Section 404(b) of the Sarbanes-
Oxley Act [Pub. L. 107-204, Sec. 404(b) 116 Stat. 745 (2002)]).
---------------------------------------------------------------------------

    The following table summarizes the scaled disclosure accommodations 
available to EGCs and SRCs for periodic reports as well as certain 
other filings.\893\
---------------------------------------------------------------------------

    \893\ Many of the scaled disclosure accommodations apply to 
filings other than periodic reports. Some of these filings are 
identified in the table. Though not within the scope of this 
release, this information is included here to provide additional 
context.

------------------------------------------------------------------------
      Scaled disclosure          Emerging growth      Smaller reporting
         requirement                 company               company
------------------------------------------------------------------------
Audited Financial Statements   2 years in    2 years.
 Required.                     a Securities Act
                               registration
                               statement for an
                               IPO of common
                               equity.
                               3 years in
                               an IPO of debt
                               securities.
                               3 years in
                               an annual report or
                               Exchange Act
                               registration
                               statement, unless
                               the company is also
                               an SRC.
Description of Business       Standard disclosure    Development
 (Item 101).                   requirements apply.   of its business
                                                     during the most
                                                     recent three years,
                                                     including:
                                                    [cir] form and year
                                                     of organization;
                                                    [cir] bankruptcy
                                                     proceedings;
                                                    [cir] material
                                                     reclassification,
                                                     merger, sale or
                                                     purchase of assets;
                                                     and
                                                    [cir] description of
                                                     the business.
                                                     Not
                                                     required:
                                                    [cir] seasonality;
                                                    [cir] working
                                                     capital practices;
                                                    [cir] backlog; or
                                                    [cir] government
                                                     contracts.
                                                     Names of
                                                     principal
                                                     suppliers.
                                                     Royalty
                                                     agreements or labor
                                                     contracts.
                                                     Need for
                                                     government approval
                                                     of principal
                                                     products and
                                                     services.
                                                     Effect of
                                                     existing or
                                                     probable
                                                     governmental
                                                     regulations.
Market Price of and           Standard disclosure   Not required to
 Dividends on the              requirements apply.   provide the stock
 Registrant's Common Equity                          performance graph.
 and Related Stockholder
 Matters (Item 201).
Selected Financial Data       Not required to       Not required.
 (Item 301).                   present selected
                               financial data for
                               any period prior to
                               the earliest
                               audited period
                               presented in
                               initial
                               registration
                               statement.
Supplementary Financial Data  Not required until    Not required.
 (Item 302).                   after IPO.
MD&A (Item 303).............  May limit discussion   May limit
                               to those years for    discussion to those
                               which audited         years for which
                               financial             audited financial
                               statements are        statements are
                               included.             included.
                                                     Not
                                                     required to comply
                                                     with contractual
                                                     obligations table
                                                     requirements in
                                                     303(a)(5).
Quantitative and Qualitative  Standard disclosure   Not required, but
 Disclosures about Market      requirements apply.   related disclosure
 Risk (Item 305).                                    may be required in
                                                     MD&A.
Extended Transition for        May elect
 Complying with New or         to defer compliance
 Revised Accounting            with new or revised
 Standards.                    financial
                               accounting
                               standards until a
                               company that is not
                               an ``issuer'' \894\
                               is required to
                               comply with such
                               standards.
                               Any          Standard disclosure
                               decision to forego    requirements apply.
                               the extended
                               transition period
                               is irrevocable.
Internal Control over          Not          Non-accelerated
 Financial Reporting (Item     required to provide   filers, a category
 308).                         attestation report    that includes SRCs,
                               of the registered     are not required to
                               public accounting     provide an
                               firm.                 attestation report
                               Not exempt    of the registered
                               from Item 308(a),     public accounting
                               but newly public      firm.
                               company is not
                               required to comply
                               until it either has
                               filed or has been
                               required to file an
                               annual report for
                               the prior fiscal
                               year.
Executive Compensation         Permitted     2 years of
 Disclosure (Item 402).        to follow             summary
                               requirements for      compensation table
                               SRCs \895\.           information, rather
                               Exempt from   than 3.
                               principal executive   Limited to
                               officer pay ratio     principal executive
                               disclosure.           officer, two most
                                                     highly compensated
                                                     executive officers
                                                     and up to two
                                                     additional
                                                     individuals no
                                                     longer serving as
                                                     executive officers
                                                     at year end.\896\
                                                     Not
                                                     required:
                                                       [cir]
                                                        compensation
                                                        discussion and
                                                        analysis;

[[Page 23990]]

 
                                                       [cir] grants of
                                                        plan-based
                                                        awards table;
                                                       [cir] option
                                                        exercises and
                                                        stock vested
                                                        table;
                                                       [cir] change in
                                                        present value of
                                                        pension
                                                        benefits;
                                                       [cir] CEO pay
                                                        ratio;
                                                       [cir]
                                                        compensation
                                                        policies as
                                                        related to risk
                                                        management; or
                                                       [cir] pension
                                                        benefits table.
                                                     Description
                                                     of retirement
                                                     benefit plans.
Certain Relationships and     Standard disclosure    Lower
 Related Party Transactions    requirements apply.   threshold to
 (Item 404).                                         disclose related
                                                     party transactions.
                                                     Not
                                                     required to
                                                     disclose procedures
                                                     for review,
                                                     approval or
                                                     ratification of
                                                     related party
                                                     transactions.
                                                     Additional
                                                     requirement to
                                                     disclose certain
                                                     controlling
                                                     entities.
                                                     Required to
                                                     disclose related
                                                     party transactions
                                                     not only since the
                                                     beginning of last
                                                     fiscal year but
                                                     also for the
                                                     preceding fiscal
                                                     year.\897\
Corporate Governance (Item    Standard disclosure    Not
 407).                         requirements apply.   required to
                                                     disclose whether it
                                                     has an audit
                                                     committee financial
                                                     expert until its
                                                     second annual
                                                     report following
                                                     IPO.\898\
                                                     Exempt from
                                                     requirements to
                                                     disclose
                                                     compensation
                                                     committee
                                                     interlocks and
                                                     insider
                                                     participation and
                                                     to provide a
                                                     compensation
                                                     committee
                                                     report.\899\
Risk Factors (Item 503(c))..  Standard disclosure   Not required in
                               requirements apply.   periodic
                                                     reports.\900\
Ratio of Earnings to Fixed    Required for same     Not required.\903\
 Charges (Item 503(d)) \901\.  number of years for
                               which it provides
                               selected financial
                               data disclosures
                               \902\.
------------------------------------------------------------------------

    a. Comments Received
---------------------------------------------------------------------------

    \894\ An ``issuer'' is defined in Section 2(a) of the Sarbanes-
Oxley Act to mean an issuer whose securities are registered under 
Exchange Act Section 12, that is required to file reports under 
Securities Act Section 15(d), or that has filed a registration 
statement that has not yet become effective and that it has not 
withdrawn. Public Law 107-204, Sec. 2(a), 116 Stat. 747 (2002).
    \895\ Public Law 112-106, Sec. 102(c), 126 Stat. 306 (2012).
    \896\ Item 402(m)(2) of Regulation S-K [17 CFR 229.402(m)(2)]. 
Companies that are not SRCs must provide disclosure for the 
principal executive officer, principal financial officer, three most 
highly paid executive officers and up to two additional individuals 
no longer serving as executive officers. Item 402(a)(3) of 
Regulation S-K [17 CFR 229.402(a)(3)].
    \897\ Item 404(d) of Regulation S-K [17 CFR 229.404(d)].
    \898\ Item 407(g)(1) of Regulation S-K [17 CFR 229.407(g)(1)].
    \899\ Item 407(g)(2) of Regulation S-K [17 CFR 229.407(g)(2)].
    \900\ Item 1A of Form 10-K [17 CFR 249.310]; Item 1A of Form 10-
Q [17 CFR 249.308a]. SRCs also are not required to provide the 
information required by Item 503(c) of Regulation S-K in Exchange 
Act registration statements on Form 10 [17 CFR 249.210].
    \901\ The staff is separately considering Item 503(d) of 
Regulation S-K in developing recommendations for the Commission for 
potential changes to update or simplify certain disclosure 
requirements. For a description of this project, see Section I.
    \902\ See Jumpstart Our Business Startups Act Frequently Asked 
Questions, Generally Applicable Questions on Title I of the JOBS 
Act, Question 27 (May 3, 2012), available at https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
    \903\ Item 503(e) of Regulation S-K [17 CFR 229.503(e)].
---------------------------------------------------------------------------

    S-K Study. One commenter encouraged the Commission not to issue 
guidance or rules to increase the scope of companies eligible for EGC 
status or to defer further the application of internal control 
requirements, such as the requirement to provide an auditor attestation 
report, for EGCs that outgrow their EGC status.\904\
---------------------------------------------------------------------------

    \904\ See CII.
---------------------------------------------------------------------------

    Two commenters suggested that EGCs should be exempt from Item 305 
disclosure.\905\ These commenters specified that companies that have 
not yet reached the revenue or market capitalization thresholds that 
would disqualify them from EGC status are unlikely to face meaningful 
market risks. These commenters also recommended eliminating the 
requirement in Item 101(c) to disclose the amount of backlog orders 
believed to be firm for EGCs, stating the concept of backlog is not a 
``meaningful metric'' for most of these companies. In addition, these 
commenters noted that the threshold for agreements that are 
``immaterial in amount or significance'' in Item 601(b)(10)(ii)(A) is 
too low for EGCs, because they often enter into agreements with parties 
that have a five percent or greater ownership of the company.\906\
---------------------------------------------------------------------------

    \905\ See Silicon Valley; M. Liles.
    \906\ Id.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. One commenter generally 
supported the concept of scaled disclosure requirements noting that 
smaller companies face challenges when preparing annual reports.\907\ 
Another commenter expressed concerns with a differential disclosure 
regime for different sized entities, stating that investors will factor 
the differences into their price determinations (i.e., they will price 
the lack of transparency, clarity and comparability in what may be 
perceived to be lower-quality requirements).\908\ One commenter 
recommended that requirements related exclusively to SRCs should be 
grouped together under separate headings in Regulation S-K.\909\
---------------------------------------------------------------------------

    \907\ See UK Financial Report Council.
    \908\ See CFA Institute.
    \909\ See Shearman.
---------------------------------------------------------------------------

b. Discussion
    In simplifying disclosure requirements for small businesses, we 
seek to facilitate capital formation without compromising investor 
protection. Previous Commission efforts in this area have focused on 
reducing requirements that impede the formation and growth of small 
businesses and,

[[Page 23991]]

given the nature of these smaller companies, the Commission determined 
are not necessary for the protection of investors.\910\
---------------------------------------------------------------------------

    \910\ See, e.g., Form S-18 Release and Small Business 
Initiatives Proposing Release.
---------------------------------------------------------------------------

    The disclosure items formerly required by Form S-18 generally were 
consistent with the corresponding items in Form S-1. However, Form S-18 
required less extensive narrative disclosure and simplified financial 
statements, consistent with Regulation A. Based on input from public 
hearings and written comments, the Commission sought to require in Form 
S-18 only the information that normally would be applicable to those 
small businesses expected to use the form. Accordingly, the Commission 
reduced or eliminated requirements that it determined were particularly 
burdensome to small businesses and tended to elicit information that, 
in the small business context, was less relevant or less beneficial to 
investors.\911\
---------------------------------------------------------------------------

    \911\ See Form S-18 Release.
---------------------------------------------------------------------------

    For example, Form S-18 did not use the description of business 
requirement from Regulation S-K. Instead, Form S-18 provided smaller 
issuers the flexibility to discuss other business-related disclosure, 
such as their dependence on a limited number of customers or suppliers 
(including suppliers of raw materials or financing) and cyclicality of 
their industry, only if it would have ``a material impact upon the 
registrant's future financial performance.'' \912\ In addition, Form S-
18 required two years of audited financial statements prepared in 
accordance with U.S. GAAP,\913\ similar in content to those required by 
Regulation A at the time,\914\ as opposed to the more detailed 
requirements in Form S-1. In adopting Form S-18, the Commission stated 
its belief that the simplified financial statements and schedules would 
result in costs savings to registrants while providing investors 
adequate information about these smaller offerings.\915\
---------------------------------------------------------------------------

    \912\ Form S-18 Release at 21570; See also 1977 Regulation S-K 
Adopting Release.
    \913\ Specifically, Form S-18 required: (1) A consolidated 
balance sheet as of a date within ninety days prior to the date of 
filing; and (2) consolidated statements of income, source and 
application of funds, and other stockholders' equity for the two 
fiscal years prior to the date of filing. See Form S-18 Release.
    \914\ Until 2015, Regulation A required financial statements to 
be prepared in accordance with U.S. GAAP. In 2015, the Commission 
revised Regulation A to allow Canadian issuers to prepare their 
financial statements in accordance with either U.S. GAAP or 
International Financial Reporting Standards. See 2015 Regulation A 
Release.
    \915\ See Form S-18 Release.
---------------------------------------------------------------------------

    Under Regulation S-B, the narrative disclosure requirements 
generally paralleled those in Regulation S-K at the time, except that 
Regulation S-B incorporated the simplified requirements of Form S-18. 
The financial information required by Regulation S-B was substantially 
similar to that required by Form S-18, except that Regulation S-B also 
addressed interim financial statement requirements.\916\
---------------------------------------------------------------------------

    \916\ See Small Business Initiatives Adopting Release. See also 
supra note 913.
---------------------------------------------------------------------------

    In 2007, the Commission eliminated the separate Regulation S-B 
disclosure requirements and instead provided scaled disclosure 
requirements in Regulation S-K and Regulation S-X.\917\ For example, 
new paragraph (h) to Item 101 of Regulation S-K set forth the 
alternative disclosure standards for smaller companies that had 
appeared in Item 101 of Regulation S-B.\918\ The Commission included an 
index in Item 10 to identify the Items of Regulation S-K containing 
scaled disclosure requirements for SRCs.\919\
---------------------------------------------------------------------------

    \917\ See SRC Adopting Release.
    \918\ Item 101(h) of Regulation S-K [17 CFR 229.101(h)].
    \919\ Item 10(f) of Regulation S-K [17 CFR 229.10(f)].
---------------------------------------------------------------------------

    In response to comment letters and the recommendation of the ACSPC, 
the Commission revised the requirements in Regulation S-X to require 
two years of comparative audited balance sheet data for SRCs, rather 
than the one year previously required by Regulation S-B.\920\ The 
Commission noted that the additional balance sheet data would provide a 
more meaningful presentation for investors without a significant 
additional burden on SRCs, because the earlier year data would be 
readily available for purposes of preparing the otherwise required 
statements of income, cash flows and changes in stockholders' 
equity.\921\
---------------------------------------------------------------------------

    \920\ See SRC Adopting Release.
    \921\ See id.
---------------------------------------------------------------------------

    Unlike Regulation S-B, which required small business issuers to 
comply with the entire Regulation S-B disclosure regime, the amendments 
to Regulation S-K adopted in 2007 permitted SRCs to comply selectively 
with the scaled disclosure requirements on an item-by-item basis.\922\ 
The Commission intended the amendments to eliminate redundancies and 
provide a more streamlined disclosure system for SRCs.\923\
---------------------------------------------------------------------------

    \922\ Id. Where a disclosure requirement applicable to SRCs was 
more stringent than the corresponding requirement for other 
registrants, SRCs were required to comply with the more stringent 
standard. The SRC Adopting Release identified Item 404 of Regulation 
S-K as the only instance where the requirements applicable to SRCs 
could be more stringent than the larger company standard.
    \923\ Id.
---------------------------------------------------------------------------

    In recent years, the Small Business Forum has recommended that the 
Commission:
     Eliminate or significantly reduce the extent of XBRL 
tagging requirements for SRCs; and
     permit SRCs to exclude line item-responsive disclosures 
from their periodic reports if such disclosures are not material.\924\
---------------------------------------------------------------------------

    \924\ See, e.g., 2014 Forum Report; Final Report of the 2013 SEC 
Government-Business Forum on Small Business Capital Formation, June 
2014, available at https://www.sec.gov/info/smallbus/gbfor32.pdf; 
31st Annual SEC Government-Business Forum on Small Business Capital 
Formation Final Report, Nov. 15, 2012, available at https://www.sec.gov/info/smallbus/gbfor31.pdf.
---------------------------------------------------------------------------

    Similarly, in the last few years, the ACSEC has recommended that 
the Commission:
     exempt SRCs from XBRL tagging requirements; \925\
---------------------------------------------------------------------------

    \925\ See 2015 ACSEC Recommendations; Advisory Committee on 
Small and Emerging Companies Recommendations Regarding Disclosure 
and Other Requirements for Smaller Public Companies, Feb. 1, 2013, 
(``2013 ACSEC Recommendations''), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf.
---------------------------------------------------------------------------

     exempt SRCs from filing immaterial attachments to material 
contracts; \926\ and
---------------------------------------------------------------------------

    \926\ See 2015 ACSEC Recommendations; 2013 ACSEC 
Recommendations.
---------------------------------------------------------------------------

     when adopting new disclosure rules, consider whether such 
rules place a disproportionate burden on SRCs in terms of the cost of, 
and time spent on, compliance with such requirements, and if so, 
provide for exemptions from or phase-in periods for such new rules for 
SRCs.\927\
---------------------------------------------------------------------------

    \927\ See 2013 ACSEC Recommendations.
---------------------------------------------------------------------------

    In 2015, the FAST Act directed the Commission to revise Regulation 
S-K to further scale or eliminate requirements in order to reduce the 
burden on EGCs, accelerated filers, SRCs, and other smaller issuers, 
while still providing all material information to investors.\928\ Given 
these recommendations and the recent legislative directive, we are 
seeking public input on whether we should expand or eliminate any of 
our scaled disclosure requirements to further ease the compliance 
burden for smaller registrants and, if so, how we could do so without 
sacrificing investor protection.
---------------------------------------------------------------------------

    \928\ Public Law 114-94, Sec. 72002(1), 129 Stat. 1312 (2015).
---------------------------------------------------------------------------

c. Request for Comment
    268. Are there any disclosure requirements for which scaling is not 
appropriate?
    269. How should we assess whether scaled disclosures are effective 
at

[[Page 23992]]

achieving the Commission's mission of protecting investors, maintaining 
fair and orderly markets and facilitating capital formation?
    270. Are there disclosure requirements that are particularly 
beneficial for investors in smaller registrants? For example, are there 
disclosure requirements that elicit information that is not as readily 
available outside of smaller registrants' filings although this 
information might be readily available outside of a filing for larger 
or more seasoned companies? If so, which requirements and why? Does the 
information elicited from smaller registrants by these disclosure 
requirements appropriately consider the costs of these requirements to 
these smaller registrants?
    271. Are there additional item requirements that we should consider 
scaling for SRCs? Are there any current scaled disclosure requirements 
that we should scale further or eliminate entirely?
    272. Should we allow EGCs to take advantage of the scaled 
disclosure requirements currently available only to SRCs, such as the 
less extensive requirements for the description of business set forth 
in Item 101(h) of Regulation S-K or the elimination of the contractual 
obligations table available under Item 303(d) of Regulation S-K?
    273. Should we reorganize Regulation S-K, as recommended by one 
commenter,\929\ to group the requirements related exclusively to SRCs 
together under separate headings? Why or why not?
---------------------------------------------------------------------------

    \929\ See Shearman.
---------------------------------------------------------------------------

    274. Should we eliminate or reduce the XBRL tagging requirements 
for SRCs? What, if any, XBRL tagging should we require of SRCs?
    275. Should we permit SRCs to exclude disclosure that would be 
responsive to specific items in Regulation S-K from their periodic 
reports if such disclosures are not material? Should we permit SRCs to 
omit all such disclosure or should we limit this accommodation to 
specific items in Regulation S-K?
    276. What types of investors or audiences would be affected by 
further scaling? How?
    277. Do our scaled disclosure requirements appropriately consider 
the costs and benefits of these requirements to smaller registrants and 
investors in these registrants? What savings (or costs avoided) for 
registrants, including the administrative and compliance costs of 
preparing and disseminating disclosure, would likely arise from scaling 
additional item requirements? Please provide quantifications of savings 
and costs avoided where possible.
3. Frequency of Interim Reporting
    The federal securities laws have required registrants to provide 
annual reports since 1934.\930\ In 1955, the Commission adopted rules 
requiring registrants to file semi-annual reports on Form 9-K.\931\ In 
the proposing release for Form 9-K, the Commission stated that 
``consideration should be given to requiring reports of certain 
significant information more frequently than annually.'' \932\ 
Investors and the securities industry supported the semi-annual 
reporting proposal, while registrants opposed it.\933\
---------------------------------------------------------------------------

    \930\ As enacted, Section 13 of the Exchange Act required listed 
companies to furnish annual reports, and if the Commission required, 
quarterly reports. John Hanna, The Securities Exchange Act as 
Supplementary of the Securities Act, 4 Law & Contemp. Probs. 256, 
256-268 (1937). Exchange Act reporting requirements were extended to 
non-listed registrants with the enactment of Section 12 of the 
Exchange Act in 1964. See supra note 14.
    \931\ See Semi-Annual Reports, Release No. 34-5189 (June 23, 
1955) [20 FR 4816 (July 7, 1955)]. The Form 9-K was filed once a 
year, 45 days after the end of the first half the registrant's 
fiscal year. The semi-annual report required disclosure with respect 
to sales and gross revenues, net income before and after taxes, 
extraordinary and special items, and charges and credits to earned 
surplus. Form 9-K did not require formal statements of profit and 
loss or earned surplus and was not required to be certified.
    \932\ Notice of Proposed Rule Making, Semi-Annual Reports, 
Release No. 34-5129 (Jan. 27, 1955) [20 FR 771 (Feb. 4, 1955)] at 
772.
    \933\ See Philip Augar, For Markets There is Such a Thing as Too 
Much Information, Financial Times, Feb. 1, 2015 (``Augar'').
---------------------------------------------------------------------------

    The Commission has required quarterly reporting since 1970, when it 
adopted Form 10-Q to replace the semi-annual report on Form 9-K.\934\ 
However, prior to adopting Form 10-Q, more than seventy percent of 
public companies produced quarterly reports, partially in response to 
exchange listing standards.\935\ As adopted in 1970, Form 10-Q required 
summarized financial information and profit and loss information in 
more detail than was required by Form 9-K, including data on earnings 
per common share. In addition, information on a registrant's 
capitalization and stockholders' equity was also required.\936\
---------------------------------------------------------------------------

    \934\ See Quarterly Reporting Form, Release No. 34-9004 (Oct. 
28, 1970) [35 FR 17537 (Nov. 14, 1970)] (``Form 10-Q Adopting 
Release''). Form 10-Q was adopted in response to the Wheat Report. 
See Wheat Report at 357-58 (``More and more publicly-held 
corporations are releasing condensed quarterly financial 
information. Both the New York and American Stock Exchanges require 
publication of such information by all listed companies, although 
the standards which they set for such information are minimal . . . 
The Study carefully examined a significant sample of quarterly 
financial reports and releases provided by the two exchanges. It was 
readily apparent . . . that they varied from extremely useful to 
extremely poor and uninformative . . . It was concluded that a 
useful advance in disclosure policy could be achieved by developing 
standards for quarterly financial reporting.'').
    \935\ See Arthur Kraft et al., Real Effects of Frequent 
Financial Reporting (Cass Business School, City University London, 
Working Paper Series No. 26, Aug. 2014) at 2 (``Kraft et al.''). See 
also Marty Butler et al., The effect of reporting frequency on the 
timeliness of earnings: The cases of voluntary and mandatory interim 
reports, 43 J. Acct. Econ. 181, 185 (2007).
    The New York Stock Exchange began requiring annual reports in 
1914, and by 1923, over twenty-five percent of NYSE-listed companies 
were publishing quarterly reports with another eight percent 
publishing semi-annual reports. By 1933, over sixty percent of NYSE-
listed companies were publishing quarterly reports and twelve 
percent published semi-annual reports. See James E. Davis, Corporate 
Disclosure through the Stock Exchanges, Apr. 24, 1999 (unpublished 
paper) (on file with Harvard Law School and available at https://cyber.law.harvard.edu/rfi/papers/disclose.pdf).
    The Form 10-Q proposing release also noted that ``[m]any 
publicly held companies are releasing condensed quarterly financial 
information, and the major stock exchange[s] require publication of 
such information by listed companies.'' Form 10-Q For Disclosure of 
Financial Information, Release No. 34-8683 (Sept. 1969) [34 FR 14239 
(Sept. 10, 1969)].
    \936\ See Form 10-Q Adopting Release.
---------------------------------------------------------------------------

    In 1981, in connection with its integrated disclosure initiatives, 
the Commission revised Form 10-Q to ``build upon the annual reporting 
system to ensure meaningful disclosure on a continuous basis by making 
quarterly reporting a mechanism to update the annual report.'' \937\ 
The amendments were intended to complement the previously adopted 
revisions relating to annual reporting, and included the addition of 
management's discussion and analysis of interim financial 
information.\938\ Other significant additions to Form 10-Q over time 
have included quantitative and qualitative disclosures about market 
risk,\939\ disclosure controls and procedures,\940\ and risk 
factors.\941\
---------------------------------------------------------------------------

    \937\ See New Interim Financial Information Provisions and 
Revision of Form 10-Q for Quarterly Reporting, Release No. 33-6288 
(Feb. 9, 1981) [46 FR 12480 (Feb. 17, 1981)] (``New Interim 
Financial Information Release'') at 12481.
    \938\ Id.
    \939\ See Disclosure of Market Risk Sensitive Instruments 
Release.
    \940\ See Certification of Disclosure in Companies' Quarterly 
and Annual Reports, Release No. 33-8124 (Aug. 29, 2002) [67 FR 57276 
(Sept. 9, 2002)].
    \941\ See Securities Offering Reform Release.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. One commenter suggested that 
semiannual financial reporting may be sufficient for SRCs that are not 
listed on a national exchange, noting that scaling the requirement in 
this way would align the treatment of SRCs with that of comparable 
companies that are now

[[Page 23993]]

able to rely on the exemption under Regulation A.\942\
---------------------------------------------------------------------------

    \942\ See Ernst & Young 2.
---------------------------------------------------------------------------

b. Discussion
    The Commission adopted quarterly reporting with the purpose of 
ensuring meaningful disclosure to investors on a continuous basis.\943\ 
The Wheat Report concluded that one of the principal omissions in the 
Exchange Act reporting system was the absence of a quarterly summary of 
basic financial information prepared using reasonably specific 
standards.\944\ The Wheat Report also concluded that ``a regular, 
quarterly report would be more useful than the current reports on Form 
8-K, which were filed irregularly.'' \945\ Accordingly, quarterly 
reports were intended to provide a mechanism to update the information 
in an annual report on Form 10-K in a more consistent manner and on a 
regular basis.
---------------------------------------------------------------------------

    \943\ See New Interim Financial Information Release.
    \944\ See Wheat Report at 332-334.
    \945\ See id. at 332.
---------------------------------------------------------------------------

    The value of quarterly financial reporting has been the subject of 
debate.\946\ Opponents of quarterly reporting argue that frequent 
financial reporting may lead management to focus on short-term results 
to meet or beat earnings targets rather than on long-term 
strategies.\947\ Consequently, some have argued that quarterly reports 
should be discontinued \948\ or made voluntary \949\ in the United 
States.\950\
---------------------------------------------------------------------------

    \946\ The debate over quarterly reporting sometimes includes 
concerns of ``short-termism.'' The discussion here is not intended 
to capture all aspects of, or issues raised in, the short-termism 
debate.
    For a list of recent publications on short-termism, see Therese 
Strand, Re-Thinking Short-Termism and the Role of Patient Capital in 
Europe: Perspectives on the New Shareholder Rights Directive, 22 
Colum. J. Eur. L. 1, footnote 26 (2015) at footnote 26.
    \947\ See Kraft et al.
    \948\ See Martin Lipton, Legal & General Calls for End to 
Quarterly Reporting, Aug. 19, 2015, available at https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.24734.15.pdf. The 
author suggests that the Commission should consider the UK's move 
toward discontinuing quarterly reporting in pursuing disclosure 
reform initiatives. He notes that Legal & General Investment 
Management, a global investment firm with more than [pound]700 
billion in assets under its management, contacted the boards of 
London Stock Exchange's 350 largest companies to support the 
discontinuation of quarterly reporting. According to the author, 
Legal & General emphasized that short-term reporting ``is not 
necessarily conducive to building a sustainable business'' and 
``adds little value for companies that are operating in long-term 
business cycles.'' See also David Benoit, Time to End Quarterly 
Reports, Law Firm Says, The Wall Street Journal, Aug. 19, 2015, 
available at; https://www.wsj.com/articles/time-to-end-quarterly-reports-law-firm-says-1440025715.
    \949\ See Augar.
    \950\ Other jurisdictions have eliminated quarterly reporting. 
For example, in the European Union, the requirement for issuers 
traded on a regulated market to publish financial information more 
frequently than annual financial reports and semi-annual reports was 
abolished in 2013. See Directive 2013/50/EU of the European 
Parliament and of the Council, Oct. 22, 2013, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013L0050. 
Following implementation, E.U. member states generally will require 
only annual and semi-annual reports. However, an E.U. member state 
may require issuers to publish additional periodic financial 
information if the requirement does not constitute a significant 
financial burden and if the required information is proportionate to 
the factors that contribute to investment decisions. Id.
---------------------------------------------------------------------------

    On the other hand, some advocates of frequent reporting, typically 
on a quarterly basis, point out that greater frequency improves the 
timeliness of earnings and reduces information asymmetry between 
managers and investors.\951\ Others are skeptical of the benefits of 
eliminating quarterly reporting requirements.\952\ According to one 
survey of institutional investors, fifty-eight percent of investors 
preferred to receive information on a quarterly basis to confirm or 
reframe expectations.\953\ Some advocates have expressed concern that 
eliminating quarterly reporting requirements would result in 
inconsistent reporting intervals across registrants and potentially, 
from period to period.\954\ Meanwhile, others argue that delaying a 
report by a few months would not fix the problems of short-
termism.\955\
---------------------------------------------------------------------------

    \951\ See Kraft et al.
    \952\ See Ronald Barusch, Dealpolitik: Attention CFOs--Don't Get 
Your Hopes Up for an End to Quarterly Reporting, The Wall Street 
Journal Blog, Aug. 20, 2015 (``Barusch''), available at https://blogs.wsj.com/moneybeat/2015/08/20/dealpolitik-attention-cfos-dont-get-your-hopes-up-for-an-end-to-quarterly-reporting (``Eliminating 
quarterly reporting won't make investors any less interested in 
quarterly results. Analysts and professional investors will do their 
best to figure out what the quarterly would have shown even if 
companies don't disclose it themselves.'').
    \953\ See Ernst & Young, Right team, right story, right price, 
(2013), available at https://www.ey.com/Publication/vwLUAssets/
Investment_appetite_up_for_IPOs_among_institutional_investors/$FILE/
Institutional_Investor_Survey.pdf.
    \954\ See, e.g., Barusch (expressing concerns that eliminating 
the quarterly report requirement could allow public companies to 
``provide just what they want the public to know in whatever 
intervals they choose,'' whereas the ``current rules require 
quarterly GAAP-compliant financial information in a standard 
format'').
    \955\ See Barry Ritholtz, Wrong Fix for Short-Term Corporate 
Thinking, Bloomberg, Aug. 20, 2015, available at https://www.bloombergview.com/articles/2015-08-20/wrong-fix-for-short-term-corporate-thinking; and Mark J. Roe, The Imaginary Problem of 
Corporate Short-Termism, The Wall Street Journal, Aug. 17, 2015, 
available at www.wsj.com/articles/the-imaginary-problem-of-corporate-short-termism-1439853276.
---------------------------------------------------------------------------

    The value of quarterly reporting may vary by industry or by the 
size of the registrant. For example, investors in smaller, capital-
intensive technology companies may focus more on significant business 
or technology developments than on quarterly financial reports.\956\ 
Similarly, the costs of more frequent reporting may impose a 
disproportionate burden on smaller or less capitalized 
registrants.\957\ At the same time, smaller registrants may be more 
volatile and quarterly reporting may provide more timely disclosure of 
performance issues.\958\ Additionally, because smaller, capital-
intensive companies may need greater or more frequent access to capital 
markets, more frequent reporting may provide greater investor 
confidence and a lower cost of capital for these companies.\959\
---------------------------------------------------------------------------

    \956\ See Transcript, Meeting of SEC Advisory Committee on Small 
and Emerging Companies (Sept. 23, 2015) at 64-65 (noting that some 
biotechnology companies may not trade on their financial quarterly 
reporting but rather, may trade on their fundamental clinical 
development and regulatory events). The ACSEC discussed issues 
raised by quarterly reporting for small and emerging companies at 
its September 2015 meeting but did not issue formal recommendations. 
See id.
    \957\ See id. at 60-61.
    \958\ See id. at 74.
    \959\ See id. at 87-90.
---------------------------------------------------------------------------

c. Request for Comment
    278. Do investors, registrants and the markets benefit from 
quarterly reporting? What are the benefits and costs to investors, 
registrants and the markets from the current system of quarterly 
reporting? Should we revise or eliminate our rules requiring quarterly 
reporting? Why or why not?
    279. Should the reporting requirements be different for different 
types of registrants? Should we consider permitting SRCs to file 
periodic reports on a less frequent basis, such as semi-annually? If 
so, what disclosures should we require in those reports?
    280. Should we allow other categories of registrants to file 
periodic reports on a less frequent basis, such as semi-annually? If 
so, which categories of registrants should be permitted to file less 
frequently, and what disclosure should be required?
    281. Should we require certain registrants to file periodic reports 
on a more frequent basis such as monthly?
    282. Should we consider reducing the level of disclosure required 
in the quarterly reports for the first and third quarters? If so, what 
disclosure should we require in these abbreviated quarterly reports? 
Should the disclosure requirements for SRCs be the same as those that 
apply to other categories of registrants?
    283. Do quarterly reporting obligations influence the strategic 
goals and timelines of registrants' management? Do quarterly reporting

[[Page 23994]]

obligations help or hinder long-term decision making by registrants?
    284. What types of investors or audiences are most likely to value 
the information that registrants disclose in quarterly reports?
    285. What are the savings (or costs avoided) for registrants, 
including the administrative and compliance costs of preparing and 
disseminating disclosure, that would likely arise from revising or 
eliminating our rules requiring quarterly reporting? Please provide 
quantifications of savings and costs avoided where possible.

V. Presentation and Delivery of Important Information

    Given the volume, complexity and sophistication of corporate 
disclosures, the presentation and delivery of information may play a 
significant role in investors' ability to access and use important 
disclosure. The Commission's own disclosure system creates some 
fragmentation of information, in both location and time. Registrants 
provide disclosure on Forms 10-K, 10-Q, and 8-K, which are filed on 
EDGAR. Registrants also can provide broad, non-exclusionary 
distribution of information under Regulation FD either on Form 8-K or 
through press releases, conference calls, or Web sites.\960\ In 
addition, registrants may use tools such as cross-referencing and 
incorporation by reference to reduce repetitive disclosure and present 
more streamlined information in each filing. As different investors and 
third parties likely use disclosures in different ways, the benefits of 
different presentation and delivery approaches may vary.
---------------------------------------------------------------------------

    \960\ See Selective Disclosure and Insider Trading, Release No. 
33-7881 (Aug. 15, 2000) [65 FR 51716 (Aug. 24, 2000)] (``Regulation 
FD Release'').
---------------------------------------------------------------------------

    The S-K Study recommended that the staff consider ways to present 
information that would improve the readability and navigability of 
disclosure. It also recommended that the staff explore methods to 
discourage repetition and disclosure of immaterial information.\961\ 
Additionally, the FAST Act requires the Commission to issue regulations 
permitting registrants to submit a summary page in their Form 10-K only 
if each item on the summary page includes a cross-reference (by 
electronic link or otherwise) from each item in the summary to the 
related material in the Form 10-K.\962\
---------------------------------------------------------------------------

    \961\ See S-K Study at 98-99.
    \962\ Public Law 114-94, Sec. 72001, 129 Stat. 1312 (2015).
---------------------------------------------------------------------------

    In light of the S-K Study's recommendations and the recent FAST Act 
mandate, we are seeking public input on how our rules can facilitate 
the readability and navigability of disclosure documents. We are 
seeking public input on the use of tools such as cross-referencing, 
incorporation by reference, hyperlinks and registrant Web sites as well 
as other ways we could change our disclosure requirements to improve 
the readability and navigability of registrant filings.\963\ Given the 
various types of filings and other delivery methods available to 
registrants, we also are seeking input on where information should be 
provided directly and in full, and where references to the location of 
the information may suffice. Additionally, we are interested in whether 
any required disclosures would be more effective if we required 
registrants to present them in a specified format, such as a tabular or 
graphic presentation, to layer the disclosures by means of a summary or 
overview, or to provide certain information as structured data.
---------------------------------------------------------------------------

    \963\ Some of the concepts raised in this section, such as 
incorporation by reference to Securities Act filings, may include 
filings outside of the scope of this release.
---------------------------------------------------------------------------

A. Cross-Referencing

    In lieu of presenting duplicative disclosure, our rules generally 
permit registrants to cross-reference to information in one section of 
a document to satisfy a disclosure requirement in another section of 
the document. Several items in Regulation S-K specify that a company 
may include in its financial statements or related notes a cross-
reference to certain information in the non-financial statement 
disclosure or, conversely, a company may cross-reference from the 
disclosure to the financial statements or notes thereto.\964\ In 
addition to allowing for cross-referencing, Item 303(a)(4) of 
Regulation S-K requires that the substance of the cross-referenced 
information be integrated into the discussion to help inform readers of 
the significance of the information that is omitted from MD&A.\965\
---------------------------------------------------------------------------

    \964\ See, e.g., Items 101(b) and (d)(2), 202(a)(5), and 
Instruction 5 to Item 303(a)(4) of Regulation S-K [17 CFR 229.101(b) 
and (d)(2), 17 CFR 229.202(a)(5), and 17 CFR 229.303(a)(4)]. For a 
discussion of circumstances where cross-referencing would not be 
permissible or appropriate, see Section V.A.2.c.
    \965\ Instruction 5 to Item 303(a)(4) of Regulation S-K [17 
CFR229.303(a)(4)].
---------------------------------------------------------------------------

1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. Many commenters provided 
recommendations supporting the use of cross-referencing.\966\ A few of 
these commenters recommended clear and precise cross-references to help 
investors locate important information in the current volume of 
disclosure.\967\ Several supported greater use of cross-referencing to 
eliminate redundancies.\968\ One of these commenters supported the use 
of cross-referencing where appropriate to eliminate duplicative 
information but suggested that any referenced document should be 
considered ``filed with the SEC'' for legal and liability 
purposes.\969\ One of these commenters supported cross-referencing so 
long as the level of auditor assurance was not diminished.\970\ This 
same commenter noted that many sections within Commission filings are 
meant to touch on the same topic but from a different perspective and 
encouraged the Commission to consider not whether those sections should 
be eliminated, but whether they should be tailored to meet the original 
disclosure objective.
---------------------------------------------------------------------------

    \966\ See, e.g., letter from Thomas Amy (June 5, 2014) (``T. 
Amy''); CCMC; SCSGP; CFA Institute; Shearman; ABA 2; letter from 
William J. Klein and Thomas J. Amy (Dec. 12, 2014) (``Klein and Amy 
1''); letter from William J. Klein and Thomas J. Amy (Aug. 31, 2015) 
(``Klein and Amy 4''); AFL-CIO.
    \967\ See, e.g., T. Amy; Klein and Amy 1; Klein and Amy 4.
    \968\ See, e.g., ABA 2; CCMC; CFA Institute; Shearman.
    \969\ See AFL-CIO.
    \970\ See CFA Institute.
---------------------------------------------------------------------------

    Some commenters suggested that the Commission require or encourage 
the use of cross-references within filings.\971\ One of these 
commenters recommended a new Commission policy on the avoidance of 
duplication and the use of cross-references.\972\ This commenter 
recommended adding instructions to specific Regulation S-K items to 
encourage the use of cross-references to avoid duplicative 
disclosure.\973\ This commenter also recommended that the inclusion of 
responsive disclosure anywhere in a document should be sufficient to 
satisfy the disclosure requirement without the need to include

[[Page 23995]]

a cross-reference in each item calling for the information.\974\
---------------------------------------------------------------------------

    \971\ See, e.g., Klein and Amy 1 (recommending that the 
Commission consider requiring that filers: (1) Make specific cross-
references between the line items on their financial statements and 
the related notes, including the page where the note may be found; 
and (2) include a detailed table of contents or index for the notes, 
which would increase the transparency of financial information and 
make it easier to read and understand); Klein and Amy 4 (reiterating 
their previous recommendations and recommending that the Commission 
consider requiring that filers provide specific cross-references 
between all discussions of Legal Proceedings that appear in 
different sections of the report and in the notes to the financial 
statements); ABA 2; Shearman.
    \972\ See ABA 2.
    \973\ See id. (recommending amendments to Items 101(c)(ix) and 
303(a)(1), (4) and (5) to state that ``cross-references should be 
used to avoid duplicative disclosure'').
    \974\ See id. The one exception recommended was for the 
financial statements and notes to the financial statements, where 
cross-references should not be used to satisfy U.S. GAAP 
requirements. However, where the financial statements and notes to 
the financial statements include disclosure that is responsive to 
Regulation S-K items, the commenter recommended that the rules allow 
an appropriate cross-reference to the relevant financial statement 
disclosure to satisfy the requirement.
---------------------------------------------------------------------------

2. Discussion
    We recognize that an investor may find it easier to access all 
relevant information in a single location, even if a portion of the 
information is repeated elsewhere in the document. However, repetitive 
disclosure may obscure relevant information or render it difficult to 
evaluate the importance of the information. Below, we consider ways in 
which cross-references could potentially be used to reduce redundant 
disclosure and improve the navigability of lengthy documents.
a. Cross-References to Reduce Repetitive Disclosure
    Where different disclosure requirements call for the same 
information in separate parts of the same document, as discussed above, 
our rules generally allow the registrant to cross-reference to the 
applicable discussion in another part of the document rather than 
duplicating the disclosure.\975\ In some instances, Regulation S-K and 
U.S. GAAP requirements call for similar but not identical 
disclosures.\976\ A registrant, subject to certain conditions, may 
present all the information required by both requirements in one 
location, with the second location simply containing a cross-reference 
back to the first location.\977\ In this way, the related disclosures 
may be logically presented together and both requirements met in their 
separate locations within the filing while avoiding duplicative or 
partially duplicative disclosure.
---------------------------------------------------------------------------

    \975\ See Section V.A.
    In the Securities Act context, Commission staff has discouraged 
registrants from repeating disclosure in multiple places in a 
prospectus, instead encouraging the inclusion of a brief overview to 
provide context in one section along with a cross-reference to more 
detailed discussion elsewhere. See also Updated Staff Legal Bulletin 
No. 7. In addition, Securities Act Rule 421(b), amended at the same 
time as our Plain English Rules, discourages repeating disclosure in 
more than one location that lengthens the filing without enhancing 
the quality of the information. See Note 4 to Rule 421(b) [17 CFR 
230.421(b)]; Plain English Disclosure Adopting Release.
    \976\ See, e.g., Item 103 of Regulation S-K (Legal proceedings) 
[17 CFR 229.103] and ASC Topic 450 (Contingencies); Item 404 of 
Regulation S-K (Transactions with related persons, promoters and 
certain control persons) [17 CFR 229.404] and ASC Topic 850 (Related 
Party Disclosures). The staff is separately considering Item 103 in 
developing recommendations for potential changes to update or 
simplify the requirements. For a description of these 
recommendations, see Section I.
    \977\ In some instances, a cross-reference is effectively 
prohibited because it would be inconsistent with the disclosure 
requirement. For example, the table of contractual obligations calls 
for aggregated information in a single location. A registrant could 
not satisfy the requirement to provide the data required in the 
table of contractual obligations with a cross-reference in MD&A to 
multiple financial statement footnotes. See Item 303(a)(5) of 
Regulation S-K [17 CFR 229.303(a)(5)]; and Off-Balance Sheet and 
Contractual Obligations Adopting Release.
---------------------------------------------------------------------------

    In seeking input on how registrants can most effectively present 
and deliver important information, we recognize that information may be 
relevant to more than one filing or more than one section of a given 
filing. Registrants often repeat information in response to different 
item requirements in Form 10-K. For example, disclosure about the 
registrant's business appears in the Business section, and parts of 
that disclosure may be repeated in MD&A, risk factors, and the 
footnotes to the financial statements. Repetition of this information 
may be beneficial in certain contexts, such as a registrant with a 
complex organizational structure or business model. Repetition also may 
provide users of disclosure with direct access to the information they 
need in a consistent location, particularly to the extent that 
different audiences for disclosure focus on different filings or 
sections of filings. In other instances, such repetition can be 
distracting.
i. Request for Comment
    286. Do investors find that cross-referencing within a filing in 
lieu of repeating the disclosure helps them locate important 
information? Why or why not?
    287. Are there specific items in Regulation S-K that would benefit 
from greater use of cross-referencing to reduce duplicative disclosure? 
If so, which items? For these specific items, should we amend the item 
to specifically encourage use of cross-references? Alternatively, and 
as suggested by a commenter,\978\ should we amend these items to meet 
the original disclosure objective more effectively?
---------------------------------------------------------------------------

    \978\ See CFA Institute.
---------------------------------------------------------------------------

    288. Does cross-referencing negatively affect investors' ability to 
use disclosure by creating inconsistency in the location of information 
across different registrants and different filings? To what extent does 
cross-referencing introduce challenges with respect to comparative 
analyses or large-scale automated processing of disclosure?
    289. Should we require registrants to provide certain disclosures 
in the same location (e.g., under a specific item of the form) in every 
filing, rather than permitting cross-referencing? If so, which 
information should be located consistently and where should that 
information be located?
    290. To what extent does the flexibility to use cross-references 
reduce compliance and administrative costs to registrants of preparing 
and disseminating disclosures? Please provide quantifications if 
possible.
b. Cross-References To Navigate Disclosure
    Cross-references can also assist readers in navigating disclosure 
where disclosures are not necessarily duplicative but relate to the 
same topic and may be required in multiple locations throughout a 
filing.\979\ For example, a discussion in the business section about 
how a registrant generates revenue may benefit from a cross-reference 
to the registrant's revenue recognition policy. Similarly, a risk 
factor that the registrant may not be able to meet payments on its 
outstanding debt may benefit from a reference to the debt footnote in 
the financial statements. Including these cross-references may help 
readers obtain a more complete picture by directing them to other 
similar information that the reader may not have otherwise reviewed. In 
addition, where registrants include a summary or overview of their 
filing or part of their filing, as contemplated by the FAST Act,\980\ 
cross-references can assist the reader in locating the more detailed 
disclosure included elsewhere in the filing.\981\
---------------------------------------------------------------------------

    \979\ For a discussion of hyperlinks, see Section V.C.
    \980\ Public Law 114-94, Sec. 72001, 129 Stat. 1312 (2015).
    \981\ See, e.g., H.R. Rep. 114-279, 114th Cong., 1st Sess. 4 
(2015) (stating ``[b]ecause the typical 10-K . . . is hundreds of 
pages long, investors find it difficult to locate important 
information'' and that ``a summary page would enable companies to 
concisely disclose pertinent information . . . [and] would also 
enable investors to more easily access the most relevant information 
about a company''). For a discussion of layered disclosure, see 
Section V.F.
---------------------------------------------------------------------------

i. Request for Comment
    291. Are there certain items or topics that would benefit from a 
cross-reference to related or more comprehensive disclosure in 
different parts of the filing? If so, what are those items or topics?
    292. Do cross-references that identify related information make the 
disclosure more or less readable?
c. Limitations on Cross-Referencing
    Registrants' ability to use cross-references is not unlimited, as 
the

[[Page 23996]]

Commission has discouraged cross-references that render disclosure 
unclear or incomplete. It also has acknowledged that vague or excessive 
cross-references can hinder the reader's ability to locate and 
understand information.\982\ Moreover, even specific cross-references 
may draw the reader away from key information.\983\
---------------------------------------------------------------------------

    \982\ See Plain English Disclosure, Release No. 33-7380 (Jan. 
14, 1997) [62 FR 3152 (Jan. 21, 1997)].
    \983\ See U.S. Securities and Exchange Commission, Office of 
Investor Education and Assistance. A Plain English Handbook: How to 
Create Clear SEC Disclosure Documents (1998), available at https://www.sec.gov/pdf/handbook.pdf.
---------------------------------------------------------------------------

    While none of our rules prohibit the use of cross-references, there 
may be instances where cross-references would not satisfy the 
requirements or would detract from the readability or completeness of 
the disclosure. For example, the Commission has stated that its MD&A 
rules are intended to provide, in one section of a filing, a discussion 
of all the material impacts on the registrant's financial condition or 
results of operations, including those arising from circumstances 
discussed elsewhere in the filing.\984\
---------------------------------------------------------------------------

    \984\ See 1989 MD&A Interpretive Release. This guidance predated 
the use of hyperlinking technology. For a discussion of the 
limitations on hyperlinks to related materials, see Section V.C.
---------------------------------------------------------------------------

    Cross-referencing is contemplated under auditing standards.\985\ 
However, some auditors have expressed concern that cross-referencing 
from the financial statements to MD&A may confuse users on the 
auditor's responsibilities and what information the auditor's report 
covers.\986\ Others have stated that the financial statements and the 
related notes should stand on their own so they can be audited or 
reviewed, as applicable.\987\
---------------------------------------------------------------------------

    \985\ AU 508, Paragraph 41 provides: Inadequate disclosure. 
Information essential for a fair presentation in conformity with 
generally accepted accounting principles should be set forth in the 
financial statements (which include the related notes). When such 
information is set forth elsewhere in a report to shareholders, or 
in a prospectus, proxy statement, or other similar report, it should 
be referred to in the financial statements. [Emphasis added]
    \986\ See, e.g., letter from PricewaterhouseCoopers LLP to FASB, 
Nov. 29, 2012, available at https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175825243422&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=621509&blobheadervalue1=filename%3DDISFR.DP.0029.PRICEWATERHOUSECOOPERS_LLP.pdf&blobcol=urldata&blobtable=MungoBlobs (recommending that notes not cross-reference to MD&A as it 
will not be clear what the audit report covers).
    \987\ See, e.g., Financial Accounting Standards Board and Center 
for Audit Quality, Financial Statement Disclosure Effectiveness: 
Forum Observations Summary, Oct. 2012, available at https://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176160567809 (``FASB/CAQ Forum'') (noting that some 
participants opposed cross-referencing as a tool to address 
disclosure overlap between MD&A and notes to financial statements 
due to concerns related to audit responsibility or because they felt 
that MD&A and the notes should each stand on their own); letter from 
PricewaterhouseCoopers LLP to FASB, July 10, 2014, available at 
https://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=2014-200 (expressing 
concern that disclosures presented outside the audited financial 
statements prepared in accordance with U.S. GAAP may not be subject 
to the same degree of scrutiny and assurance). See also ABA 2 
(recommending a policy encouraging cross-referencing, except in the 
financial statements and notes to the financial statements, which 
should be considered a standalone section).
---------------------------------------------------------------------------

    In addition, the financial statements are not covered by the PSLRA 
safe harbor from liability for forward-looking statements. The PSLRA 
does, however, cover MD&A disclosures.\988\ While nothing prohibits 
cross-referencing between the financial statements and, for example, 
MD&A, forward-looking statements pulled from MD&A into the financial 
statements could ``lose'' their PSLRA safe harbor. Accordingly, 
preparers concerned about forward-looking information may have a 
disincentive to include a cross-reference in the financial statements 
to forward-looking information elsewhere in the document out of concern 
that doing so would effectively pull the statements into the financial 
statements and expose the registrant to liability without the 
protection of the PSLRA for such statements.\989\
---------------------------------------------------------------------------

    \988\ 15 U.S.C. 78u-5. See also Off-Balance Sheet and 
Contractual Obligations Adopting Release.
    \989\ See e.g., FASB/CAQ Forum.
---------------------------------------------------------------------------

i. Request for Comment
    293. Are there items or topics where cross-references detract from 
the readability of a filing? Are there items or topics where we should 
prohibit cross-references and require all related information be 
presented in a single location? What are these items or topics?
    294. Some of the Commission's guidance limiting the use of cross-
referencing pre-date the expanded use of technology that allows 
registrants to hyperlink to referenced disclosure.\990\ In light of 
technological changes that allow hyperlinks, which we discuss below, 
should we reconsider those rules that seek to provide investors with 
information in a single location?
---------------------------------------------------------------------------

    \990\ See supra note 984.
---------------------------------------------------------------------------

    295. Should we introduce requirements or guidance for the use of 
cross-references in order to increase the consistency in location of 
information across periods and registrants? If so, what requirements or 
guidance should we consider?

B. Incorporation by Reference

    Rule 12b-23 of the Exchange Act generally allows a registrant to 
incorporate by reference information in any part of a registration 
statement or report in answer, or partial answer, to any other item of 
a registration statement or report.\991\ In Form 10-K, registrants may 
incorporate by reference the information called for by Parts I and II 
\992\ of Form 10-K from the company's annual report to security 
holders. Registrants also may incorporate by reference the information 
required by Part III of Form 10-K from the registrant's definitive 
proxy statement or information statement, as applicable.\993\ The staff 
has provided interpretive guidance on Rule 12b-23, stating that within 
the guidelines specified by the rule, a registrant may incorporate by 
reference into its own Exchange Act documents any information contained 
in the filed documents of another issuer.\994\
---------------------------------------------------------------------------

    \991\ Exchange Act Rule 12b-23 [17 CFR 240.12b-23]. In addition, 
Item 10(d) of Regulation S-K provides that where rules, regulations, 
or instructions to forms permit incorporation by reference, 
information may be incorporated by reference to the specific 
document and to the prior filing or submission containing the 
information. 17 CFR 229.10(d).
    \992\ Subject to some scaled disclosure requirements discussed 
in Section IV.H above, Parts I and II of Form 10-K generally require 
the following information:
     Part I: Business, Risk Factors, Unresolved Staff Comments, 
Properties, Legal Proceedings, and Mine Safety Disclosures.
     Part II: Market for Registrant's Common Equity, Related 
Stockholder Matters and Issuer Purchases of Equity Securities, 
Selected Financial Data, MD&A, Quantitative and Qualitative 
Disclosures about Market Risk, Financial Statements and 
Supplementary Data, Changes in and Disagreements with Accountants on 
Accounting and Financial Disclosure, Controls and Procedures, and 
Other Information.
    \993\ Subject to some scaled disclosure requirements discussed 
in Section IV.H, Part III of Form 10-K generally requires the 
following information: Directors, Executive Officers and Corporate 
Governance; Executive Compensation; Security Ownership of Certain 
Beneficial Owners and Management and Related Stockholder Matters; 
Certain Relationships and Related Transactions and Director 
Independence; and Principal Accounting Fees and Services.
    To incorporate Part III information into the Form 10-K, the 
proxy statement or information statement must be filed not later 
than 120 days after the end of the fiscal year covered by the Form 
10-K See General Instruction G(3) to Form 10-K.
    \994\ See Exchange Act Rules Compliance and Disclosure 
Interpretations Question 134.01, available at https://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps.htm.
---------------------------------------------------------------------------

    Rule 12b-23 provides that where material is incorporated by 
reference:
     The material must be clearly identified by page, 
paragraph, and caption or otherwise;
     the filing must state that the specified matter is 
incorporated by

[[Page 23997]]

reference at the particular place in the report where the information 
is required; and
     except in certain circumstances, a copy of any information 
incorporated by reference or the pertinent pages of the document 
containing such information must be filed as an exhibit to the report 
where it is incorporated by reference.\995\
---------------------------------------------------------------------------

    \995\ Exchange Act Rule 12b-23 [17 CFR 240.12b-23]. Rule 12b-
23(a)(3) provides that the following need not be filed as an 
exhibit: A proxy or information statement incorporated by reference 
in response to Part III of Form 10-K; a form of prospectus filed 
pursuant to 17 CFR 230.424(b) incorporated by reference in response 
to Item 1 of Form 8-A; and information filed on Form 8-K.
---------------------------------------------------------------------------

    For exhibits, Rule 12b-32 allows any document or part thereof filed 
with the Commission to be incorporated by reference as an exhibit to 
any report filed with the Commission by the registrant or any other 
person.\996\ Registrants regularly satisfy exhibit filing requirements 
by relying on Rule 12b-32 to incorporate exhibits by reference to 
previously filed reports or registration statements.\997\ Rule 12b-32 
also allows a registrant to meet the exhibit filing requirement of Rule 
12b-23(a)(3) by incorporating by reference as an exhibit the document 
or portion of the document containing the information incorporated by 
reference under that rule.\998\
---------------------------------------------------------------------------

    \996\ Rule 12b-32 [17 CFR 240.12b-32].
    \997\ Item 601(a) of Regulation S-K [17 CFR 229.601(a)].
    \998\ Rule 12b-23 [17 CFR 240.12b-23(a)(3)].
---------------------------------------------------------------------------

1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness. One commenter suggested that the 
Commission encourage the use of incorporation by reference by revising 
Rule 12b-23(a)(3) to eliminate the requirement that copies of the 
pertinent pages containing incorporated disclosure be filed as an 
exhibit and ease the navigability of filings by requiring incorporated 
disclosure to be made accessible via hyperlink in the filed 
document.\999\ Another commenter stated that many registrants fail to 
provide the page, paragraph, citation or other information required by 
Rule 12b-23(b), rendering the references less helpful.\1000\
---------------------------------------------------------------------------

    \999\ See ABA 2.
    \1000\ See Klein and Amy 1; Klein and Amy 4.
---------------------------------------------------------------------------

2. Discussion
    The Commission has a long history of permitting incorporation by 
reference.\1001\ Incorporation by reference was a key component of Form 
S-3, introduced as part of the integrated disclosure system, based on 
the efficient market theory.\1002\ The Commission envisioned that its 
integrated disclosure system would eliminate duplicative disclosure by 
allowing registrants to incorporate by reference information filed in 
Exchange Act reports into Securities Act registration statements.\1003\ 
The Commission also acknowledged that incorporation by reference has 
limitations, as there is no assurance that the mere reference to 
incorporated information will be meaningful to an investor or potential 
investor.\1004\
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    \1001\ See Release No. 34-51 (Nov. 27, 1934) [not published in 
the Federal Register] (adopting the first Exchange Act rule, JB4, 
allowing registrants to incorporate by reference as an exhibit any 
document previously or concurrently filed with the Commission under 
the Exchange Act); see also Registration and Reporting Rules and 
Rules of General Application [13 FR 9321 (Dec. 31, 1948)] and 1948 
Adoption of Amendments to General Rules and Regulations Release 
(adopting early versions of Rules 12b-23 and 12b-32).
    \1002\ See 1982 Integrated Disclosure Adopting Release at 11382 
(stating that ``Form S-3, in reliance on the efficient market 
theory, allows maximum use of incorporation by reference of Exchange 
Act reports and requires the least disclosure to be presented in the 
prospectus and delivered to investors'' and that ``[g]enerally, the 
Form S-3 prospectus will present the same transaction-specific 
information as will be presented in a Form S-1 . . . The prospectus 
will not be required to present any information concerning the 
registrant unless there has been a material change . . . which has 
not been reported in an Exchange Act filing or the Exchange Act 
reports incorporated by reference do not reflect certain restated 
financial statements or other financial information.''). For a 
description of the efficient market theory, see supra note 163.
    \1003\ See 1980 Form 10-K Proposing Release.
    Certain Commission forms allow historical incorporation by 
reference, meaning a registrant or issuer may incorporate 
information by reference to previous filings. Examples include 
Exchange Act Form 8-A, which allows for incorporation by reference 
of the description of a registrant's securities if a comparable 
description is contained in a prior filing. See Instruction to Item 
1 of Form 8-A [17 CFR 249.208a]. Certain Securities Act registration 
statements also permit historical incorporation by reference, such 
as Form S-3, Form S-4, and Form S-11, which allow incorporation by 
reference of previous Exchange Act filings into the prospectus. See 
Item 12(a) of Form S-3 [17 CFR 239.13]; Item 11(a) of Form S-4 [17 
CFR 239.25]; Item 29(a) of Form S-11 [17 CFR 239.18].
    Certain Securities Act forms allow for forward incorporation by 
reference by certain issuers, where an issuer is permitted to 
forward incorporate by reference to Exchange Act reports filed in 
the future. Examples include Form S-3 and Form S-4. See Item 12(b) 
of Form S-3 [17 CFR 239.13]; Item 11(b) of Form S-4 [17 CFR 239.25]. 
In addition, the FAST Act recently directed the Commission to revise 
Form S-1 to permit SRCs to incorporate by reference to future 
filings. Public Law 114-94, Sec. 84001, 129 Stat. 1312 (2015); See 
also FAST Act Interim Rules Release.
    Given the scope of this release and its focus on Exchange Act 
periodic reports, the discussion here generally is limited to 
historical incorporation by reference.
    \1004\ See 1980 Form 10-K Proposing Release.
---------------------------------------------------------------------------

    The Commission initially limited eligibility to incorporate by 
reference in registration statements to seasoned, exchange-traded 
companies based on the likelihood that the information in the 
incorporated filings has been thoroughly analyzed and reflected in the 
price or rating of the securities offered. For these types of 
registrants, the Commission concluded that the cost savings to 
registrants of not having to repeat or refile information disclosed 
elsewhere outweighed the risk to investors that the stock price does 
not reflect the omitted information.\1005\
---------------------------------------------------------------------------

    \1005\ See id.
---------------------------------------------------------------------------

    The integrated disclosure system also gave rise to the current 
structure of Form 10-K that allows registrants to incorporate Parts I 
and II from the annual report to shareholders and Part III from the 
definitive proxy statement.\1006\ For periodic reports, registrants 
regularly incorporate by reference the information required by Part III 
of Form 10-K from their definitive proxy statements. Fewer registrants 
incorporate Parts I and II of Form 10-K from their annual reports to 
shareholders.\1007\ This likely is because many companies have 
eliminated their separate annual report to shareholders and instead use 
Form 10-K to satisfy their Rule 14a-3 requirements.\1008\ For exhibits, 
registrants often incorporate by reference exhibits from prior filings 
into their periodic reports.
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    \1006\ See 1980 Form 10-K Adopting Release. Although Form 10-K 
was amended in 1980 to reflect the current structure, the Commission 
has allowed some form of incorporation by reference from the annual 
report to shareholders to satisfy requirements of Form 10-K since 
1942. See Amendment to Forms for Registration and Filing Annual 
Reports [7 FR 10653 (Dec. 22, 1942)] and Release No. 34-3347 [not 
published in the Federal Register] (Dec. 18, 1942).
    \1007\ Based on data compiled by DERA, in calendar year 2014 
approximately two percent of registrants incorporated some portion 
of the information required in either Part I or Part II of their 
Form 10-K from their annual report to shareholders, with more 
registrants incorporating Part II information than Part I 
information.
    \1008\ Exchange Act Rule 14a-3 [17 CFR 240.14a-3]; see Randi 
Morrison and Broc Romanek, Annual Report & 10-K Wrap Handbook: 
Practice Guide & Toolkit, Jul. 2014 (noting that more than fifty 
percent of companies use a ``10-K wrap''); Neil Stewart, Designers 
discuss trends in the latest crop of annual reports, IR Magazine, 
Jun. 14, 2011, available at https://www.irmagazine.com/articles/earnings-calls-financial-reporting/18271/directions-annual-reports/ 
(noting that investors are ``far more likely to [receive] a plain 
10K filing or perhaps a 10K-wrap'' and that ``[t]he traditional 
annual report may have been all but killed off by the austere 10K-
wrap'').
---------------------------------------------------------------------------

    Advancements in technology support greater use of incorporation by 
reference. In Securities Offering Reform, the Commission expanded the 
use of incorporation by reference conditioned on the registrant making 
its incorporated Exchange Act reports and other materials readily 
accessible on a Web site maintained by or for the

[[Page 23998]]

registrant.\1009\ By conditioning the ability to incorporate by 
reference on the ready availability of a registrant's incorporated 
Exchange Act reports and other materials on its Web site, the 
Commission sought to provide investors with the ability to obtain the 
information from those reports and materials at the same time that they 
would have been able to obtain the information if it were set forth 
directly in the registration statement.\1010\
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    \1009\ See General Instruction VII.F. to Form S-1; General 
Instruction VI.F to Form F-1.
    \1010\ See Securities Offering Reform Release. Issuers may 
satisfy this condition by including hyperlinks directly to the 
reports or other materials filed on EDGAR or on another third-party 
Web site where the reports or other materials are available and 
access to the reports or other materials is free of charge to the 
user. See General Instruction VII.F. to Form S-1; General 
Instruction VI.F to Form F-1. The Commission noted that this manner 
of access was similar to those for disclosure of Web site access to 
an accelerated filer's Exchange Act reports. See Securities Offering 
Reform Release. In adopting the requirements for accelerated filers, 
the Commission noted that, while these reports were already 
available through the Commission Web site, access through company 
Web sites was still desirable to encourage the availability of 
information in a variety of locations and to foster best practices 
for making that information broadly accessible. See Acceleration of 
Periodic Report Filing Dates and Disclosure Concerning Web site 
Access to Reports, Release No. 33-8128 (Sept. 5, 2002) [67 FR 58480 
(Sept. 16, 2002)].
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3. Request for Comment
    296. To what extent does including previously disclosed information 
along with recent developments in a single self-contained filing 
facilitate an investor's understanding of a registrant's disclosure? 
Does repeating information that previously has been disclosed hinder an 
investor's ability to identify information that has changed since the 
registrant's last report? Does providing previously disclosed 
information along with information that is new or has changed better 
enable investors to consider the changes in context? If so, should we 
structure our requirements to elicit disclosure that highlights changes 
from a registrant's last report and provides a comprehensive discussion 
in a single location?
    297. Should we expand or limit registrants' ability to incorporate 
by reference? Why or why not? Does incorporation by reference make the 
disclosure more or less readable?
    298. Are there particular filings or sections of filings that 
should remain direct sources of disclosure information, rather than 
permitting incorporation by reference? If so, what information should 
be located consistently and in which filings? Which sections of those 
filings should contain the information? For example, is it more 
important for an investor to have information included directly and in 
full in a Securities Act registration statement than it is in an 
Exchange Act filing?
    299. Should our requirements to provide historical and recent 
information within a single self-contained filing differ for 
registrants of different sizes, development stages, reporting histories 
or other factors?
    300. Should registrants be permitted to incorporate by reference 
historical information from prior filings in lieu of presenting prior 
years' information in the Form 10-K? If so, when or how frequently 
should we require registrants to present or refresh their complete core 
disclosure? Should we limit this approach to certain categories of 
registrants and, if so, how should we determine which categories would 
be eligible?
    301. Should we expand or limit registrants' ability to incorporate 
by reference to exhibits? Why or why not? Does incorporation by 
reference make it more difficult to locate exhibits?
    302. To what extent does the flexibility to use incorporation by 
reference reduce compliance and administrative costs to registrants of 
preparing and disseminating disclosures? Please provide quantifications 
if possible.

C. Hyperlinks

    Under Rule 105 of Regulation S-T, a registrant may include 
hyperlinks within a filing, such as a table of contents that hyperlinks 
to specific sections in a filing or a cross-reference that hyperlinks 
to another part of a filing.\1011\ Rule 105 also allows registrants to 
include hyperlinks to exhibits within the same filing or hyperlinks to 
other Commission filings.\1012\ However, registrants may not include 
hyperlinks to information outside the EDGAR system, such as external 
Web sites.\1013\
---------------------------------------------------------------------------

    \1011\ Rule 105(b) of Regulation S-T [17 CFR 232.105(b)].
    \1012\ Id.
    \1013\ Rule 105 of Regulation S-T [17 CFR 232.105].
---------------------------------------------------------------------------

    Of the two formats that are generally accepted by the EDGAR system, 
the text-based American Standard Code for Information Interchange 
(``ASCII'') and hypertext markup language (``HTML''),\1014\ only the 
HTML format accommodates hyperlinks. Currently, the vast majority of 
registrants file in HTML format.\1015\ Many of these registrants 
include hyperlinks within their filings.
---------------------------------------------------------------------------

    \1014\ The EDGAR system also accepts PDF documents, but will not 
accept PDF documents containing hyperlinks. See, e.g., EDGAR Filer 
Manual, Vol. I, v. 24 (Dec. 2015) at 3-27. Most PDF documents are 
considered unofficial copies, and PDF documents are permitted as 
official filings only in limited circumstances. See Rules 101 and 
104 of Regulation S-T [17 CFR 232.101 and 17 CFR 232.104].
    \1015\ Based on data compiled by DERA, during calendar year 
2015, ASCII represented less than one percent of all Form 10-K 
filings.
---------------------------------------------------------------------------

    If a registrant includes a hyperlink in its filing, whether or not 
the link is permitted by Commission rules, the information in the 
linked material is not considered part of the filing for determining 
compliance with disclosure obligations. However, inclusion of the link 
will cause the registrant to be subject to the civil liability and 
antifraud provisions of the federal securities laws for the information 
contained in the linked material.\1016\ Similarly, if a registrant 
hyperlinks to another hyperlink, the registrant will be treated as 
making all the hyperlinked material its own for liability 
purposes.\1017\
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    \1016\ Rule 105(c) of Regulation S-T [17 CFR 232.105(c)].
    \1017\ See Rulemaking for EDGAR System, Release No. 33-7855 
(Apr. 24, 2000) [65 FR 24788 (Apr. 27, 2000)] (``2000 EDGAR 
Release'').
---------------------------------------------------------------------------

1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness. Two commenters recommended amending 
Regulation S-K to specifically encourage use of hyperlinks within a 
filing.\1018\ One of these commenters recommended requiring registrants 
to include a hyperlink to any material that is cross-referenced or 
incorporated by reference.\1019\ The other commenter suggested allowing 
a hyperlink to information posted on a registrant's Web site to satisfy 
disclosure requirements.\1020\
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    \1018\ See Shearman; ABA 2.
    \1019\ See ABA 2.
    \1020\ See Shearman.
---------------------------------------------------------------------------

2. Discussion
    In 2000, the Commission stated that it is appropriate for 
registrants to assume liability for hyperlinked material as if it were 
part of the filing, because the use of hyperlinks in filings is 
voluntary and filers need not hyperlink to material that they do not 
wish to be understood as having adopted as their own. The Commission 
cautioned registrants not to use hyperlinks if they are not prepared to 
accept responsibility for the hyperlinked material.\1021\
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    \1021\ See 2000 EDGAR Release.
---------------------------------------------------------------------------

    The EDGAR system initially permitted hyperlinks only to different 
sections within a single document. In 2000, when the Commission 
expanded the permissibility of hyperlinks to allow hyperlinks to other 
documents and exhibits filed on EDGAR, the Commission stated that 
hyperlinks

[[Page 23999]]

alone should not satisfy the disclosure requirements.\1022\ The 
Commission noted that it would not be appropriate for a registrant to 
use hyperlinks effectively to use incorporation by reference when it is 
not permitted.\1023\ In addition, when the form or rule does permit 
incorporation by reference, the registrant must comply with all of the 
form or rule requirements for such incorporation by reference.\1024\
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    \1022\ See id.
    \1023\ See id. (stating that a filer would be permitted to use 
hyperlinks to optional information for the convenience of the 
reader, but could not omit information required within the filing by 
providing it through a hyperlink).
    \1024\ For example, the filing must contain a statement that the 
document is incorporated by reference, whether or not there is a 
hyperlink. As another example, Form 10-K may incorporate information 
from a registrant's annual report to security holders, so long as 
the information is filed as an exhibit to the Form 10-K. This 
exhibit is needed even if the information also is provided by 
hyperlink. See Section V.B for a discussion of incorporation by 
reference.
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    The Commission's rationale for limiting the use of hyperlinks was 
that readers might be unable to understand the content of the filing 
without accessing numerous hyperlinks and that readers would be unable 
to print the filing as an integrated whole.\1025\ In 2008, in its 
guidance on the use of company Web sites, the Commission stated that 
the inability to print disclosure designed for interactive viewing and 
not for reading outside the electronic context, is not inherently 
detrimental to its readability.\1026\ However, it also noted that 
certain disclosure would continue to be required in a format convenient 
for both reading online and printing.\1027\
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    \1025\ See id.
    \1026\ See 2008 Web site Guidance.
    \1027\ See id. (stating that the Commission did not think it was 
necessary that information appearing on company Web sites satisfy a 
printer-friendly standard unless our rules specifically require it, 
such as the notice and access model, which requires electronically 
posted proxy materials to be presented in a format convenient for 
both reading online and printing on paper). For a discussion of 
disclosure on company Web sites, see Section V.D.
---------------------------------------------------------------------------

    Since this 2008 guidance, there has been a significant increase in 
the use of the Internet as a tool for disseminating information. As of 
2014, eighty-seven percent of the U.S. population uses the Internet, up 
from seventy-four percent in 2008.\1028\ In addition, recent data shows 
that most investors, even those who rely on financial advisors, use the 
Internet to conduct transactions and gather financial 
information.\1029\ There have also been advancements in the types of 
technologies that can be used to report and analyze information.\1030\ 
In light of these developments, we are interested in learning whether 
the Commission's prior concerns about disaggregated disclosure remain 
relevant. We are seeking public input on whether and how to revise our 
rules to take advantage of the Internet as a source of information 
about registrants.
---------------------------------------------------------------------------

    \1028\ See United Nations, International Telecommunications 
Union, Percentage of Individuals using the Internet (2015), 
available at https://www.itu.int/en/ITU-D/Statistics/Documents/statistics/2015/Individuals_Internet_2000-2014.xls.
    \1029\ See Most Investors Use the Internet for Financial 
Research, Tools and Transactions; However, Two-Thirds Prefer to 
Interact with Advisors in Person, Dec. 17, 2014, available at https://www.johnhancock.com/about/news_details.php?fn=dec1714-text&yr=2014 
(citing John Hancock's Investor Sentiment Survey and stating that 
eighty percent of investors have conducted transactions online and 
fifty-nine percent of investors prefer to use the Internet to 
research financial products).
    \1030\ See 2015 Investment Company Release; World Economic 
Forum, Global Agenda Outlook 2013, available at https://www3.weforum.org/docs/WEF_GAC_GlobalAgendaOutlook_2013.pdf (noting 
that technologies have evolved and continue to do so, while vast 
amounts of data are sent and received by billions of interconnected 
devices).
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3. Request for Comment
    303. Should we consider revising our rules to permit registrants to 
include external hyperlinks in their filings? Should we consider 
permitting registrants to include external hyperlinks in their filings 
to satisfy disclosure obligations? Why or why not? What would be the 
benefits and challenges of such a requirement? \1031\
---------------------------------------------------------------------------

    \1031\ For a discussion of the use of company Web sites and our 
requests for comment on permitting registrants to incorporate 
information from their Web sites by reference in their flings, see 
Section V.D.
---------------------------------------------------------------------------

    304. Would increased use of hyperlinks and further disaggregation 
of company disclosure into multiple filings hinder the quality or 
readability of disclosure? If so, how? What information, if any, should 
we require in a single filing or location?
    305. Should we require registrants to include hyperlinks with any 
cross-reference to specific information or a specific section within a 
filing? Why or why not? What would be the benefits and challenges of 
such a requirement? In particular, what would be the costs or savings 
in compliance and administrative costs to registrants of required 
hyperlinks?
    306. As suggested by one commenter,\1032\ should we eliminate the 
requirement under Rule 12b-23 to attach, as an exhibit, information 
incorporated by reference from another filing, so long as the 
registrant includes in the text a hyperlink to the other filing?
---------------------------------------------------------------------------

    \1032\ See ABA 2.
---------------------------------------------------------------------------

D. Company Web sites

    In certain circumstances, our rules and forms either permit or 
require the use of company Web sites as a means to provide information 
to investors. Depending on the circumstances, company Web sites may 
serve as a supplement to material filed or furnished via EDGAR, as an 
alternative to such materials, or as a stand-alone method of providing 
information to investors independent of EDGAR.\1033\ Our rules do not 
permit a registrant to satisfy disclosure requirements by incorporating 
by reference to information on registrant Web sites.\1034\
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    \1033\ See 2008 Web site Guidance. More recently, in April 2013, 
in connection with an investigation of the use of social media to 
announce operational metrics, the Commission provided guidance to 
issuers on how the 2008 Web site Guidance and Regulation FD apply to 
disclosure made through social media channels. See Report of 
Investigation Pursuant to Section 21(a) of the Securities Exchange 
Act: Netflix, Inc. and Reed Hastings, Release No. 34-69279 (Apr. 2, 
2013), available at https://www.sec.gov/litigation/investreport/34-69279.htm.
    \1034\ See Item 10(d) of Regulation S-K [17 CFR 229.10(d)] 
(providing that where rules, regulations or instructions to forms 
permit, a document may be incorporated by reference to the specific 
document and to the prior filing or submission in which such 
document was physically filed or submitted).
---------------------------------------------------------------------------

    When a company Web site supplements Commission filings, company 
information is available both on EDGAR and on the company's Web site. 
We have encouraged or required supplemental use of Web sites to make 
information more broadly accessible. For example, registrants are 
required to:
     Disclose their Web site addresses, if available, in annual 
reports on Form 10-K and state whether their Exchange Act reports are 
available on their Web sites; \1035\
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    \1035\ Accelerated filers and large accelerated filers are 
required to disclose this information. Non-accelerated filers are 
encouraged to do so. See Item 101(e) of Regulation S-K [17 CFR 
229.101(e)].
---------------------------------------------------------------------------

     make their Exchange Act reports and documents incorporated 
by reference available on their Web site as a condition to 
incorporation by reference of previously filed reports into 
prospectuses filed as part of registration statements on Form S-1 or 
Form S-11; \1036\
---------------------------------------------------------------------------

    \1036\ See Form S-1, General Instruction VII.F [17 CFR 239.11]; 
Form S-11, General Instruction H.6 [17 CFR 239.18]. In the adopting 
release for the Form S-11 amendments, the Commission noted that 
companies could satisfy the requirement to make filings available on 
their Web sites by ``including hyperlinks directly to the reports or 
other materials filed on EDGAR or on another third-party Web site 
where the reports or other materials are made available in the 
appropriate timeframe and access to the reports or other materials 
is free of charge to the user.'' See Revisions to Form S-11 to 
Permit Historical Incorporation by Reference, Release No. 33-8909, 
(Apr. 10, 2008) [73 FR 20512 (Apr. 15, 2008)].

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[[Page 24000]]

     make their Exchange Act reports and other materials 
incorporated by reference available on their Web site as a condition 
for SRCs to forward incorporate by reference into a Form S-1; \1037\
---------------------------------------------------------------------------

    \1037\ See FAST Act Interim Rules Release.
---------------------------------------------------------------------------

     provide their financial statements to the Commission and 
post them on their corporate Web site, if any, in interactive data 
format using XBRL;\1038\
---------------------------------------------------------------------------

    \1038\ See Rule 405 of Regulation S-T [17 CFR 232.405] and Item 
601(b)(101) of Regulation S-K [17 CFR 229.601(b)(101)]. In adopting 
the interactive data requirements, the Commission stated that 
requiring the submission and posting of interactive data has the 
potential to provide advantages for the investing public by making 
the data more accessible, timely, inexpensive and easier to analyze. 
See Interactive Data Release.
---------------------------------------------------------------------------

     post on their Web sites, if they maintain one, notice of 
their intent to delist or deregister their securities as a condition to 
withdrawing from registration under Section 12(b) of the Exchange 
Act;\1039\ and
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    \1039\ Exchange Act Rule 12d2-2(c)(2)(iii) [17 CFR 240.12d2-
2(c)(2)(ii)].
---------------------------------------------------------------------------

     post on their Web sites, if they maintain one, beneficial 
ownership reports filed by officers, directors and principal security 
holders under Section 16(a) of the Exchange Act.\1040\
---------------------------------------------------------------------------

    \1040\ See Exchange Act Section 16(a)(4)(C) [15 U.S.C. 78p] and 
Rule 16a-3(k) [17 CFR 240.16a-3(k)]. Section 403 of the Sarbanes-
Oxley Act [Pub. L. 107-204, Sec. 403 116 Stat. 745 (2002)] amended 
Section 16(a) of the Exchange Act [15 U.S.C. 78p] to require issuers 
to file statements of beneficial ownership on Forms 3, 4 and 5 
electronically with the Commission and issuers with company Web 
sites to post change in beneficial ownership reports on their Web 
sites. The Commission adopted Rule 16a-3(k) to require registrants 
that maintain a corporate Web site to post on its Web site all Forms 
3, 4 and 5 filed with respect to its equity securities by the end of 
the business day after filing. The Commission noted that ``One 
objective of the amendments is to encourage availability of this 
information in a variety of locations, so that it is broadly 
accessible.'' See Mandated Electronic Filing and Web site Posting 
for Forms 3, 4 and 5, Release No. 33-8230 (May 7, 2003) [68 FR 25787 
(May 13, 2003)].
---------------------------------------------------------------------------

    In some situations, registrants may satisfy a disclosure 
requirement either by filing the disclosure on EDGAR or by making it 
available on the registrant's Web site, thereby using company Web sites 
as an alternative to EDGAR.\1041\ For example, Regulation G requires a 
registrant that publicly discloses or releases a material non-GAAP 
financial measure to provide reconciliation to the most directly 
comparable U.S. GAAP measure. A registrant that releases non-GAAP 
financial measures orally, telephonically, by webcast, by broadcast, or 
by similar means may satisfy Regulation G by posting the required 
reconciliation on its Web site and disclosing the location and 
availability during the presentation.\1042\
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    \1041\ See 2008 Web site Guidance.
    \1042\ See Non-GAAP Measures Release.
---------------------------------------------------------------------------

    In addition, Item 406(c) of Regulation S-K, which requires 
disclosure of a registrant's code of ethics, requires the registrant 
to: File a copy of its code of ethics as an exhibit to its annual 
report; post the text of its code of ethics on its Web site and 
disclose in its annual report its Web site address and the fact that it 
has posted its code of ethics on its Web site; or undertake in its 
annual report to provide any person a copy of its code of ethics upon 
request.\1043\ The Commission originally proposed to require a 
registrant to file a copy of its code of ethics as an exhibit to its 
annual report.\1044\ At adoption, the Commission opted for greater 
flexibility, citing commenters' concerns that some codes are extremely 
lengthy and therefore would be difficult to file electronically on 
EDGAR and noting that many registrants already post their codes on 
their Web sites. In addition, our rules require disclosure on either 
Form 8-K or the registrant's Web site of any change to or waiver of its 
code of ethics for its senior financial officers.\1045\
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    \1043\ Item 406(c) of Regulation S-K [17 CFR 229.406(c)].
    \1044\ See Proposed Rule: Disclosure Required by Sections 404, 
406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8138 
(Oct. 22, 2002) [67 FR 66208 (Oct. 30, 2002)].
    \1045\ See Sarbanes-Oxley Act, Section 406(b) [Pub. L. 107-204, 
Sec. 406(b) 116 Stat. 745 (2002)]. See also Audit Committee 
Financial Expert and Code of Ethics Adopting Release. A registrant 
may only use its Web site to disseminate this disclosure if it 
previously has disclosed in its most recently filed annual report 
its intention to disclose these events via its Web site and the 
address of its Web site.
---------------------------------------------------------------------------

    Only in very limited circumstances do our rules allow a company's 
Web site to serve as a standalone method of providing information to 
investors wholly independent of EDGAR. Rules 12h-6 and 12g3-2(b) permit 
certain formerly reporting foreign private issuers to use their Web 
sites to provide information about the company in lieu of Exchange Act 
registration and reporting requirements. Unlike the examples above, 
where registrants' alternative to posting the information on their Web 
sites is to include it in a Commission filing, these companies are 
required to include the relevant disclosure on their Web sites. 
Otherwise, these companies would lose their exemption from registration 
under Section 12(g) of the Exchange Act.
1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness. One commenter recommended that particular 
focus should be given to adapting disclosure practices to a more 
technologically-driven marketplace.\1046\ Two commenters suggested that 
registrants be permitted to use their Web sites to satisfy certain 
disclosure requirements such as those relating to their business, 
management team, and board.\1047\ One of these commenters recommended 
that registrants use their Web site as a repository for basic corporate 
documents, such as a company's certificate of incorporation or 
bylaws.\1048\ Another commenter opposed the delivery of information 
using a registrant's Web site because it would ``raise issues, 
including liability matters, certifications, preservation of past 
disclosure, comparability and accessibility that would need to be 
addressed.'' \1049\ Another commenter stated that ``having some 
information on a company Web site and other information on EDGAR can 
cause confusion for investors because they are often unsure where, if 
anywhere, information will be, and information provided on company Web 
sites is often difficult to find.'' \1050\
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    \1046\ See Lin.
    \1047\ See CCMC (suggesting companies cross-reference their Web 
sites to satisfy certain disclosure obligations); Shearman 
(suggesting companies file certain core corporate information both 
on EDGAR and the company's Web site).
    \1048\ See Shearman.
    \1049\ See SCSGP.
    \1050\ See letter from the Federal Regulation of Securities 
Committee, Business Law Section, American Bar Association (Feb. 15, 
2016) (``ABA 3'').
---------------------------------------------------------------------------

    Another commenter acknowledged the potential efficiency to be 
gained through use of the Internet and electronic delivery, but 
suggested that, to protect the interests of investors who rely on paper 
delivery, the Commission should take steps to protect the interests or 
access of investors who depend on non-electronic access to 
information.\1051\
---------------------------------------------------------------------------

    \1051\ See AFL-CIO.
---------------------------------------------------------------------------

2. Discussion
    As noted by several commenters, today's technology provides 
virtually instant access to information through a variety of sources 
outside of EDGAR, including company Web sites.\1052\ The Internet has 
become a primary source of information for investors. We are seeking 
public input on whether and the extent to which investors benefit from 
requiring disclosure in a filing when the information is readily 
available on the registrant's Web site. We are also interested in what 
additional investor protections we should consider in the event we 
allow registrants to exclude required information from filings when the 
information is otherwise provided on their Web sites, such as 
requirements

[[Page 24001]]

for registrants to preserve disclosure provided on their Web site.
---------------------------------------------------------------------------

    \1052\ See, e.g., CCMC; SCSGP; CFA Institute; Shearman; ABA 2.
---------------------------------------------------------------------------

    Currently, investors typically can access registrants' public 
filings since 1996 through EDGAR.\1053\ Investors may request other 
public filings or records from the Commission.\1054\ However, 
information posted on company Web sites may change frequently and may 
not remain available to investors. Certain of our rules that allow 
registrants to disseminate information through their Web sites in lieu 
of including that information in a filing also require the registrant 
to maintain that information for a designated period of time. For 
example, registrants posting their code of ethics on their Web site 
under Item 406(c) are required to make the information accessible for 
as long as the registrant remains subject to Item 406.\1055\ Similarly, 
registrants required to post Exchange Act Section 16(a) filings on 
their Web sites are required to keep those filings accessible on their 
Web sites for at least a 12-month period.\1056\ As another example, 
while Regulation G does not specify how long a registrant must keep 
disclosure available on its Web site, the Commission encourages 
companies to provide ongoing Web site access to this information for at 
least a 12-month period.\1057\
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    \1053\ Registrants were phased into EDGAR over a three-year 
period ending May 6, 1996. As of that date, all domestic registrants 
were required to make their filings on EDGAR, except for filings 
made in paper because of a hardship exemption. See Rulemaking for 
EDGAR System, Release No. 33-7122 (Dec. 19, 1994) [59 FR 67752 (Dec. 
30, 1994)]; U.S. Securities and Exchange Commission, Office of 
Information Technology, Important Information About EDGAR, available 
at, https://www.sec.gov/edgar/aboutedgar.htm.
    \1054\ See U.S. Securities and Exchange Commission, Office of 
Investor Education and Advocacy, Records and Information, available 
at, https://www.sec.gov/answers/publicdocs.htm.
    \1055\ Instruction 2 to Item 406(c) of Regulation S-K [17 CFR 
229.406(c)].
    \1056\ Exchange Act Rule 16a-3(k) [17 CFR 240.16a-3(k)]. In 
addition, the Commission has stated that the availability of 
historical issuer information provides investors with more readily 
accessible information about the issuer and that issuers should be 
able to maintain historical information on their Web site so that 
information will remain accessible to the public but will not be 
considered to be reissued or republished for purposes of the 
Securities Act. See Securities Offering Reform Release.
    \1057\ See Non-GAAP Measures Release.
---------------------------------------------------------------------------

    For historical information available on company Web sites, the 
Commission has stated generally that ``the fact that investors can 
access previously posted materials or statements on a company's Web 
site does not in itself mean that such previously posted materials or 
statements have been reissued or republished for purposes of the 
antifraud provisions of the federal securities laws, that the company 
has made a new statement, or that the company has created a duty to 
update the materials or statements.'' \1058\ To help assure that 
investors understand that the posted materials or statements speak as 
of a date or period earlier than when the investor may be accessing the 
posted materials or statements, the Commission has stated that 
historical or previously posted materials or statements should be:
---------------------------------------------------------------------------

    \1058\ See 2008 Web site Guidance.
---------------------------------------------------------------------------

     Separately identified as historical or previously posted 
materials or statements, including, for example, by dating the posted 
materials or statements; and
     located in a separate section of the Web site containing 
previously posted materials or statements.\1059\
---------------------------------------------------------------------------

    \1059\ See id. These requirements are consistent with Securities 
Act Rule 433(e)(2) [17 CFR 230.433(e)(2)] (setting forth conditions 
under which Web site disclosure will not constitute an offer or a 
free writing prospectus).
---------------------------------------------------------------------------

    In other contexts, the Commission has expressed concerns about 
whether information disclosed on company Web sites would be adequately 
preserved for purposes of the reporting and liability provisions under 
the federal securities laws.\1060\
---------------------------------------------------------------------------

    \1060\ See, e.g., 2014 NRSRO Amendments Release; 2015 Investment 
Company Release.
---------------------------------------------------------------------------

    Information on company Web sites currently is subject to some but 
not all Exchange Act liability provisions. Anti-fraud provisions of the 
federal securities laws, including Exchange Act Section 10(b) and Rule 
10b-5, apply to statements made on a company Web site. If a registrant 
were to make a false or misleading statement of a material fact on its 
Web site in connection with the purchase or sale of a security, the 
registrant could face liability under Section 10(b) and Rule 10b-5. 
These anti-fraud provisions also apply in certain circumstances to 
third-party information available via hyperlink on a company Web site 
that could be attributable to the company, in the same way they would 
apply to any other statement made by, or attributable to, a 
company.\1061\
---------------------------------------------------------------------------

    \1061\ 15 U.S.C. 78j; 17 CFR 240.10b-5. See 2008 Web site 
Guidance (citing Use of Electronic Media for Delivery Purposes, 
Release No. 33-7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)]); 
Use of Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR 
25843 (May 4, 2000)]).
---------------------------------------------------------------------------

    The reporting provisions of Exchange Act Section 13(a) and Exchange 
Act Rules 13a-1 and 12b-20 generally do not apply to disclosures on 
company Web sites. However, if a company fails to satisfy a Web site 
disclosure option that relieves it of its obligation to file or furnish 
an Exchange Act report, an action could be brought under the Exchange 
Act reporting provisions based on the company's failure to file the 
report.\1062\ For example, in the event a company fails to make public 
disclosure of information as required by Regulation FD,\1063\ that 
issuer would violate Regulation FD as well as Section 13(a) or Section 
15(d) of the Exchange Act.\1064\
---------------------------------------------------------------------------

    \1062\ See 2008 Web site Guidance (citing Exchange Act Section 
13(a) [15 U.S.C. 78m] (requiring companies with a class of 
securities registered under the Exchange Act to file reports 
prescribed by the Commission) and Exchange Act Rule 13a-1 [17 CFR 
240.13a-1] (requiring such companies to file an annual report with 
the Commission)).
    \1063\ 17 CFR 243.100 et seq.
    \1064\ See Regulation FD Release; Rule 101 of Regulation FD [17 
CFR 243.101]; 15 U.S.C. 78m; 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    Material incorporated by reference into a filed document is subject 
to liability under Section 18 of the Exchange Act, which provides a 
private cause of action for a false or misleading statement of material 
fact in a filed document.\1065\ Material appearing solely outside 
Commission filings, such as on a registrant's Web site, cannot be 
incorporated by reference into a registrant's filings \1066\ and would 
not be subject to Section 18 liability.
---------------------------------------------------------------------------

    \1065\ 15 U.S.C. 78r.
    \1066\ Exchange Act Rule 12b-23 [17 CFR 240.12b-23].
---------------------------------------------------------------------------

    Liability under Sections 11 and 12(a)(2) of the Securities Act 
applies to information in Exchange Act filings when it is incorporated 
by reference in a registration statement or prospectus. Section 11 
imposes liability on an issuer for any untrue statement or omission of 
a material fact in a registration statement. Section 12(a)(2) of the 
Securities Act imposes similar liability for material misstatements or 
omissions in a prospectus or oral communication that constitutes an 
offer. This liability also applies to information incorporated by 
reference, where permitted, from Exchange Act filings filed after the 
registration statement. Under our current rules, disclosure provided on 
a registrant's Web site rather than in an Exchange Act filing cannot be 
incorporated by reference into a registration statement or prospectus. 
Accordingly, it would not be subject to Section 11 liability and would 
only be subject to Section 12(a)(2) liability to the extent it 
constitutes an offer.
3. Request for Comment
    307. Should we continue to limit the permitted sources of 
information incorporated by reference to Commission filings, or should 
we allow registrants to incorporate information from their Web sites?

[[Page 24002]]

    308. Are there challenges investors may face in using sources 
outside registrant filings to obtain information about a registrant? If 
so, what are these challenges? Would investors seeking information on a 
registrant's Web site rather than in its filings require specialized 
equipment, knowledge or expertise that some investors may not have? 
What would be the impact on investors who want to receive materials in 
paper? \1067\ What would be the impact on investors or third parties 
who engage in automated processing or large-scale analysis of 
disclosure on EDGAR?
---------------------------------------------------------------------------

    \1067\ See, e.g., Part I, Item 12(c) of Form S-3 (requiring 
issuers to state that it will provide a copy of any or all of the 
information, including Exchange Act reports, that has been 
incorporated by reference in the prospectus upon request at no cost 
to the requester).
---------------------------------------------------------------------------

    309. Would investors seeking information from third-party sources 
require specialized equipment, knowledge or expertise that some 
investors may not have? What would be the impact on investors who want 
to receive materials in paper? What other challenges would this 
approach pose for investors or for registrants?
    310. Do the benefits or challenges of incorporating information by 
reference differ based on whether the information is incorporated from 
a company's Web site or from its filings?
    311. If we allow registrants to provide required disclosure by 
incorporating information by reference to their Web sites, how could 
registrants limit or delineate the information on their Web sites that 
is ``filed'' for liability purposes? What obligation should the 
registrants have to preserve the material as incorporated or to update 
the incorporated information? How should it be preserved in the event 
the registrant exits the reporting system or goes out of business? What 
would be the impact on the reporting and liability provisions of the 
federal securities laws if this information is not preserved as 
required?
    312. Are there categories of business or financial information that 
we should permit registrants to disclose by posting on their Web sites 
in lieu of including in their periodic reports?
    313. Should we permit registrants to meet the requirements of Item 
601 of Regulation S-K by incorporating exhibits by reference to 
documents posted on their Web sites? What would be the benefits and 
challenges of such an approach?
    314. As an alternative to incorporation by reference, should we 
allow registrants to omit required information from filings when the 
information is otherwise provided on a registrant's Web site? If so, 
what information would be appropriate and what additional investor 
protections should we consider?
    315. To the extent that information about a registrant is readily 
available on its Web site, what are the benefits of continuing to 
require disclosure of the same information in the registrant's filings? 
What would be the impact on registrant liability, accuracy of reported 
information or investor protection generally if we eliminated 
disclosure requirements for information that investors routinely access 
from Web sites?
    316. Should we consider permitting incorporation by reference from 
sources other than a registrant's filings or its Web site? If we allow 
registrants to provide required disclosure by incorporating information 
by reference to third-party sources, should we require them to include 
a hyperlink to that information? Would registrants use such an option?
    317. What types of investors or third parties are most likely to 
value disclosure made available on registrant Web sites?
    318. To what extent would permitting registrants to incorporate 
information from their Web sites enable them to realize cost savings, 
including savings in the administrative and compliance costs of 
preparing and disseminating disclosure? Please provide quantifications 
of expected changes in costs if possible.

E. Specific Formatting Requirements

    The business and financial disclosure requirements in Regulation S-
K generally do not specify the precise layout or format for 
disclosure.\1068\ In adopting the earliest Exchange Act report forms, 
the Commission's emphasis was ``on substance rather than on form,'' 
giving companies ``wide latitude in the manner of presenting the 
required data.'' \1069\ Current Forms 10-K and 10-Q specify that they 
are not a blank form to be filled in but a guide to be used in 
preparing the report.\1070\
---------------------------------------------------------------------------

    \1068\ This section discusses formatting requirements that call 
for a standardized visual presentation or layout of disclosure 
within a registrant's ASCII or HTML filing. For a discussion of 
structured disclosures and our requirements for specific data 
formats to facilitate the extraction of information into 
standardized formats, see Section V.G.
    \1069\ Release No. 34-66 (Dec. 21, 1934) [not published in the 
Federal Register].
    \1070\ See General Instruction C.1 to Form 10-K [17 CFR 
249.310]; General Instruction C.1 to Form 10-Q [17 CFR 249.308a]. In 
addition, Form 10-K cites Exchange Act Rule 12b-20, which requires a 
company to include, in addition to any information specifically 
required to be included in a statement or report, any further 
material information necessary to make the required statements, in 
the light of the circumstances under which they are made, not 
misleading. See General Instruction C.3 to Form 10-K [17 CFR 
249.310]; Exchange Act Rule 12b-20 [17 CFR 240.12b-20].
---------------------------------------------------------------------------

    While our general approach allows registrants to use discretion in 
the overall layout of their disclosure, a few items prescribe the 
format for disclosure. In some cases, basic formatting requirements may 
be standardized, such as the prescribed location, order or title of 
required disclosure. For example, the structure of our periodic reports 
and related rules require registrants to include the numbers and 
captions of all items in the relevant form.\1071\ Some of our more 
specific requirements seek to elicit standardized information, such as 
prescribed tables with standardized rows and columns, such as the 
tabular disclosure of contractual obligations in Item 303(a)(5).\1072\
---------------------------------------------------------------------------

    \1071\ See, e.g., Form 10-K [17 CFR 249.310]; Exchange Act Rule 
12b-13 [17 CFR 240.12b-13].
    \1072\ Item 303(a)(5) of Regulation S-K [17 CFR 229.303(a)(5)]. 
While outside the scope of this release, Item 402 of Regulation S-K 
provides another example of prescribed format requirement calling 
for standardized tables with specified titles, rows, and columns for 
the disclosure of certain executive compensation information. [17 
CFR 229.402].
---------------------------------------------------------------------------

1. Comments Received
    S-K Study. None.
    Disclosure Effectiveness Initiative. Many commenters provided 
recommendations on the placement or presentation of registrant 
disclosure to facilitate identification of current, material 
information.\1073\ Two commenters suggested that prior to creating and 
implementing any new system, the Commission should encourage 
registrants to experiment with different formats in periodic reports, 
rather than strictly following the prescribed format of disclosure 
items in the applicable form.\1074\ One of these commenters stated that 
this would support reaching (and effectively communicating with) the 
broadest possible set of investors.\1075\ This commenter also suggested 
that our rules should incorporate the ``growing body of scholarship 
around user experience'' to improve the utility of corporate reporting. 
This commenter specified that some information lends itself well

[[Page 24003]]

to graphic presentation and that, where possible, reporting companies 
should use graphics to communicate key trends and practices to 
investors quickly and clearly. Another commenter suggested that we 
encourage registrants to base the order, prominence and extent of 
disclosures presented on the materiality of the matter covered by such 
disclosures.\1076\ One commenter recommended a more complete and 
descriptive table of contents to help investors navigate the current 
volume of disclosure.\1077\ One commenter stated that disclosure in 
``[p]lain language, clear formatting, no footnotes, no jargon, complete 
information without having to jump to another site are critical and 
doable.'' \1078\ Some commenters supported the concept of a ``company 
profile'' or ``company tab'' discussed in the S-K Study.\1079\
---------------------------------------------------------------------------

    \1073\ See, e.g., AFL-CIO; T. Amy; letter from Robert H. 
Chambers (June 13, 2014) (``R. Chambers''); CCMC; SCSGP; SIFMA; CFA 
Institute; Shearman.; ABA 2; UK Financial Reporting Council; 
Business Roundtable; Ernst & Young 2; Klein and Amy 3. Several of 
these commenters proposed various changes to EDGAR technology and 
related functionality to improve the readability, navigability, and 
usability of information.
    \1074\ See AFL-CIO; SCSGP.
    \1075\ See AFL-CIO.
    \1076\ See Ernst & Young 2.
    \1077\ See T. Amy.
    \1078\ See letter from Barbara Amsden (Oct. 25, 2015).
    \1079\ See, e.g., CCMC; SCSGP; CFA Institute; Shearman. See also 
S-K Study at 98 (recommending consideration of a framework based on 
the nature and frequency of disclosure that would include ``core'' 
disclosure or a ``company profile'' for information that changes 
infrequently and would be supplemented by periodic filings for 
information that changes more frequently).
---------------------------------------------------------------------------

    One commenter recommended disclosure in Q&A form for certain common 
risk factors, with standardized questions for all registrants allowing 
only for potential responses of ``yes,'' ``no,'' or ``NA.'' \1080\ 
Another commenter provided results of a survey that it conducted 
showing that a ``substantial majority of respondents (65 percent) 
indicated that the increased use of tables and charts would be very 
important to improving financial reporting.'' \1081\ This commenter 
stated that investors want quantitative tables with entity-specific 
information appropriately disaggregated and suggested that this 
information should be supported by ``qualitative explanations that are 
not littered with boilerplate or generic language.'' \1082\ This 
commenter further stated that standardization of quantitative 
disclosures would enhance comparability over time and among 
firms.\1083\ Similarly, another commenter recommended that companies 
consider the use of ``pie charts'' and ``bar charts'' to enhance 
certain disclosure.\1084\
---------------------------------------------------------------------------

    \1080\ See R. Chambers.
    \1081\ See CFA Institute. See also CFA Report.
    \1082\ Id.
    \1083\ See id.
    \1084\ See Klein and Amy 3 (discussing disclosure of share 
buyback programs).
---------------------------------------------------------------------------

2. Discussion
    A standard layout, format, or style requirement may enhance the 
comparability of disclosures across periods and across issuers and 
registrants. Such comparability and consistency may reduce the costs of 
acquiring information, increase valuation accuracy, and enhance 
investment efficiency.\1085\ A standardized presentation may also 
reduce the ability of registrants to choose presentation formats that 
could highlight more favorable disclosures and obscure less favorable 
ones.
---------------------------------------------------------------------------

    \1085\ See, e.g., G. DeFranco, S.P. Kothari, and R. Verdi, The 
Benefits of Financial Statement Comparability, 49 J. Acct. Res. 895, 
895-931 (2011); S. Young and Y. Zeng, Accounting Comparability and 
the Accuracy of Peer-Based Valuations Models, 90 Acct. Rev. 2571, 
2571-2602 (2015); C. Chen, D. Collins, T. Kravet, and R. 
Mergenthaler, Financial Statement Comparability and the Efficiency 
of Acquisition Decisions (working paper) (Dec. 15, 2015) available 
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2169082.
---------------------------------------------------------------------------

    However, flexibility in the presentation of disclosure may enhance 
the ability of registrants to tailor disclosure to their individual 
circumstances and investor bases. Flexibility in presenting disclosure 
could allow registrants to more effectively communicate the information 
most critical to understanding their particular company as prescriptive 
presentation requirements may increase the risk of important 
information being obscured by less important information. In addition, 
repetitive disclosure may be due in part to the structure of our 
Exchange Act forms and related rules, which require registrants to 
include in their periodic reports the numbers and captions of all items 
in the relevant form.\1086\
---------------------------------------------------------------------------

    \1086\ See, e.g., Form 10-K; Exchange Act Rule 12b-13 [17 CFR 
240.12b-13].
---------------------------------------------------------------------------

3. Request for Comment
    319. Do current disclosure requirements appropriately consider the 
need for both standardization and flexibility in presentation? If not, 
how could we change our requirements?
    320. How could we facilitate or encourage better presentation of 
disclosure by registrants?
    321. Would further prescribing the order and format for presenting 
information in annual or quarterly reports improve readability or 
increase comparability across registrants? Would such standardized 
requirements enhance the ability of investors and third parties to use 
disclosures, including for large-scale processing and analyses, in a 
more timely and efficient way?
    322. Is there particular information that investors would prefer we 
require registrants to present in a specific order or in a particular 
section of the document? If so, which information should be so 
presented? What would be the advantages or disadvantages of such an 
approach?
    323. Do item numbers and captions improve the clarity, navigability 
or overall effectiveness of disclosure? Should we revise our rules to 
reduce or eliminate the requirement to include the item numbers and 
captions from any of our forms? Why or why not?
    324. Should we revise any of our current disclosure rules to 
require a standardized tabular or graphic presentation rather than, or 
in addition to, the narrative disclosure we currently require? Which 
disclosures could be improved by a requirement for tabular or graphic 
presentation? Would such a presentation improve comparability of 
disclosure across registrants? Does increased comparability improve 
transparency or is it otherwise beneficial to investors? What would be 
the advantages or disadvantages of such an approach?
    325. Should we require registrants to present certain disclosures 
in question-and-answer format? If so, what information would be 
appropriate for this format? Should we require or permit it for certain 
types of registrants?
    326. Should we permit or require registrants to present certain 
disclosures in a ``check-the-box'' presentation, where registrants 
select the appropriate disclosure from a finite list of options? For 
example, should we require or permit registrants to indicate by 
checkbox rather than narrative disclosure portions of the information 
regarding changes in and disagreements with accountants under Item 304 
or management's conclusions regarding the effectiveness of the 
registrant's disclosure controls and procedures under Item 307? What 
would be the advantages or disadvantages of such an approach?
    327. What disclosure requirements, if any, would generate more 
meaningful disclosure if we modified or eliminated the specific 
formatting or presentation requirements and permitted greater 
flexibility in the manner of presentation?
    328. How would disclosure costs or other challenges to registrants 
be affected by any increase in the use of specific formatting or 
presentation requirements?

F. Layered Disclosure

    In first implementing our integrated disclosure system, the 
Commission

[[Page 24004]]

considered various approaches that might differentiate between 
institutional investors, professional security analysts and 
sophisticated individual investors.\1087\ These approaches included 
providing investors the option of receiving a simplified annual report 
containing summary information in lieu of the full, or portions of the, 
traditional annual report.\1088\ While the Commission did not adopt 
such an approach, it has encouraged layered disclosure in several 
instances.
---------------------------------------------------------------------------

    \1087\ See 1980 Form 10-K Adopting Release (``The Commission 
recognizes that the information content in Form 10-K not only was 
originally formulated for a specialized use, but that within those 
groups which have utilized the Form there are different 
constituencies. Those constituencies which have been the most 
frequent users of Form 10-K information are institutional investors, 
professional security analysts and sophisticated individual 
investors.'').
    \1088\ See id. The release noted that the potential approach 
would be based on an ``as yet unproven hypothesis that some users, 
particularly certain individual investors, either rely on financial 
advisers and therefore do not use detailed disclosure, or are 
overwhelmed by the technical nature or volume of presently required 
disclosure.'' However, the release also cited studies such as that 
conducted by Professors Lucia S. Chang and Kenneth S. Most at 
Florida International University indicating that the typical 
``unsophisticated small investor'' often is quite sophisticated. See 
Lucia S. Chang and Kenneth S. Most, Financial Statements and 
Investment Decisions (1979).
---------------------------------------------------------------------------

    The Wheat Report noted that special efforts should be made to call 
any unusually speculative elements or risk factors of an offering to 
the attention of the ordinary investor using an introductory 
statement.\1089\ For MD&A, the Commission has suggested registrants use 
an overview, introduction or other statement of the principal factors, 
trends or other matters that are covered in more detail elsewhere in 
the section.\1090\ The Commission cautioned that an introduction or 
overview should not be a duplicative layer of disclosure that repeats 
the more detailed discussion and analysis that follows. Instead, it 
should present information in a manner that emphasizes the information 
and analysis that is most important.
---------------------------------------------------------------------------

    \1089\ See Wheat Report at 32.
    \1090\ See 2003 MD&A Interpretive Release. For a discussion of 
executive level overviews in MD&A, see Section IV.B.3.b.
---------------------------------------------------------------------------

    In offering prospectuses, our rules require summary presentations 
where the length or complexity of the prospectus makes a summary 
useful.\1091\ Similarly, our rules require open-end management 
investment companies to include key information at the front of their 
statutory prospectuses in a standardized order to provide investors 
disclosure that is easier to use and more readily accessible, while 
retaining the comprehensive quality of the information available 
elsewhere.\1092\
---------------------------------------------------------------------------

    \1091\ See, e.g., Item 503(a) of Regulation S-K [17 CFR 
229.503(a)].
    \1092\ Form N-1A [17 CFR 239.15A].
---------------------------------------------------------------------------

1. Comments Received
    S-K Study. One commenter suggested that the Commission analyze each 
required disclosure, segregating them by nature and frequency of change 
to determine the method of filing and delivery.\1093\ This commenter 
proposed that basic information (such as the description of the 
business, risk factors, officers and directors, Web site address) that 
typically does not significantly change from quarter to quarter, absent 
a specific transaction or event, should only require updating when 
something changes. Additionally, the commenter recommended that the 
information presented in periodic reports be limited to new information 
specific to the most recent fiscal period (such as MD&A, selected 
quarterly financial data and executive compensation).
---------------------------------------------------------------------------

    \1093\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. A few commenters addressed 
layering disclosure and the use of summaries to improve 
disclosure.\1094\ One of these commenters stated that an integrated 
presentation of related information, such as layering information, with 
summary information presented first and details presented later or 
long-standing explanatory information that may still be relevant placed 
separately, perhaps as a schedule to the financial statements, enhances 
understanding of the relationship between items across financial 
statements.\1095\ Another commenter proposed a rule requiring companies 
to provide an overview describing what happened at the company over the 
past year and the company's expectation and concerns about the year to 
come.\1096\ This commenter noted that such a rule would not replace the 
more detailed financial and other business information that allows 
analysts to populate their models and otherwise scrutinize performance, 
but would permit management to identify up front what it determines to 
be the most important information in a way that is both understandable 
and provides context.
---------------------------------------------------------------------------

    \1094\ See, e.g., CFA Institute; NYC Bar; SGSCP.
    \1095\ See CFA Institute. See also CFA Report.
    \1096\ See NYC Bar.
---------------------------------------------------------------------------

    One commenter proposed the use of ``tabs'' to organize information 
topically (e.g., business, officers and directors, material risks), 
with information under various tabs to be updated appropriately and 
supplemented with periodic MD&A disclosure.\1097\ This commenter 
suggested that more effective, navigable documents should eliminate the 
need for summary disclosure for retail investors without eliminating 
material information. This commenter further noted that all investors, 
retail or institutional, should have access to full and fair 
disclosure.\1098\
---------------------------------------------------------------------------

    \1097\ See SCSGP.
    \1098\ Id.
---------------------------------------------------------------------------

2. Discussion
    As discussed in Section III.B.2., the informational needs, 
financial resources, and capacity to analyze disclosure may vary 
significantly among investors. Highly sophisticated investors may seek 
a different level or presentation of information than those with fewer 
financial or analytical resources. For example, some investors may 
prefer a summary presentation while others may seek detailed data that 
they can analyze and compare across companies or industries.\1099\ In 
addition, a ``layered'' approach to disclosure that highlights what 
management believes is the most important information, while still 
providing detailed data and analysis,\1100\ may make filings more 
navigable for all investors. On the other hand, a ``layered'' approach 
could introduce challenges for investors or third parties seeking all 
available disclosure on a particular topic, as they many need to search 
summary disclosures as well as more detailed disclosures for all data 
and commentary relevant for their purposes. The FAST Act requires the 
Commission to issue regulations permitting registrants to submit a 
summary page in their Form 10-K.\1101\ We do not address this aspect of 
layered disclosure here.
---------------------------------------------------------------------------

    \1099\ See, e.g., Study Regarding Financial Literacy Among 
Investors, (Aug. 2012) available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (finding that investors 
favor ``layered'' disclosure and, wherever possible, the use of a 
summary document containing key information about an investment 
product or service).
    \1100\ See, e.g., 2003 MD&A Interpretive Release.
    \1101\ Public Law 114-94, Sec. 72001, 129 Stat. 1312 (2015).
---------------------------------------------------------------------------

3. Request for Comment
    329. Other than a summary page, are there other approaches to 
layering or layered disclosure that we should consider for business and 
financial information in periodic reports? If so, what are the benefits 
and challenges of these approaches?

G. Structured Disclosures

    Investors, their financial advisors, and professional analysts use 
increasingly

[[Page 24005]]

complex information and find that structured disclosures facilitate 
analysis of this information.\1102\ Some investors seek structured data 
as it enhances their ability to use technology to process and 
synthesize information,\1103\ allowing for more timely and granular 
analysis of financial information, including comparative \1104\ and 
trend analysis.\1105\
---------------------------------------------------------------------------

    \1102\ See, e.g., CFA Report (stating that investors do not seek 
a reduction in data or volume of disclosures, as they can use 
technology to evaluate the data, but instead seek to identify more 
effective ways to capture, manage, analyze, present, and deliver 
financial data); Interactive Data Release (stating that many 
commenters generally supported the required submission of 
interactive data).
    \1103\ See Recommendations of the Investor Advisory Committee 
Regarding the SEC and the Need for the Cost Effective Retrieval of 
Information by Investors (July 25, 2013) (``IAC Data Tagging 
Recommendations''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/data-tagging-resolution-72513.pdf 
(recommending that the Commission (i) promote the collection, 
standardization and retrieval of data filed with the Commission 
using machine-readable data tagging formats, (ii) take steps to 
reduce the costs of providing tagged data, especially for smaller 
issuers and investors and (iii) prioritize revising existing forms 
to provide for the tagging of data in order to increase transparency 
with respect to corporate governance).
    \1104\ See Hu 2014 at 620 (noting that greater standardization 
of information allows for cross-company comparisons of performance).
    \1105\ See Institute for Corporate Responsibility at George 
Washington University and the Center for Audit Quality, Initiative 
on Rethinking Financial Disclosure, Nov. 2014, available at https://business.gwu.edu/about-us/research/institute-for-corporate-responsibility/research-projects/rethinking-financial-disclosure 
(advocating a disclosure platform that allows comparison of 
information and analysis of a company's performance trends).
---------------------------------------------------------------------------

    Structured disclosures include both numeric and narrative-based 
disclosures that are made machine-readable by having reported 
disclosure items labeled (tagged) using a markup language, such as 
eXtensible Markup Language (``XML'') \1106\ or XBRL.\1107\ Tagging 
disclosure enables information to be structured, stored, shared, and 
presented in different systems or platforms.\1108\
---------------------------------------------------------------------------

    \1106\ XML is an open source markup language to tag elements of 
a document. It does not have a defined set of tags, but instead 
provides a mechanism to define tags and structural relationships 
between tagged elements. See Norman Walsh, A Technical Introduction 
to XML (Oct. 1998), available at https://www.xml.com/pub/a/98/10/guide0.html?page=2#AEN58.
    \1107\ XBRL is an open source standardized language derived from 
XML for purposes of tagging business reporting information. Many 
commercial vendors and open source projects support the XBRL 
standards with tools and software. See Stephanie Farewell, XBRL 
International, Inc., XBRL or Customized XML? (Oct. 2010), available 
at https://www.xbrl.org/bpboarddocs/xbrlorcustomizedxml.pdf.
    \1108\ See id.
---------------------------------------------------------------------------

    Standardized markup languages, such as XBRL, use standard sets of 
data element tags for each required reporting element, referred to as 
taxonomies. Taxonomies provide common definitions that represent 
agreed-upon information or reporting standards, such as U.S. GAAP for 
accounting-based disclosures.\1109\ The resulting standardization of 
financial reporting allows for aggregation, comparison, and large-scale 
statistical analysis of reported financial and other material 
information through significantly more automated means than is possible 
with unstructured formats, such as unstructured HTML or ASCII.
---------------------------------------------------------------------------

    \1109\ See, e.g., The Standard for Reporting, available at 
https://www.xbrl.org/the-standard/what/the-standard-for-reporting; 
Financial Statements in XBRL: XBRL designed for Accounts and 
Financial Statements as well as fixed templates, available at 
https://www.xbrl.org/the-standard/what/financial-statement-data.
---------------------------------------------------------------------------

    Commission rules currently require several categories of 
registrants to provide certain information in XBRL, including, the 
following:

----------------------------------------------------------------------------------------------------------------
                                       Information required to be
       Category of registrant                    tagged               Language required    Method of submission
----------------------------------------------------------------------------------------------------------------
Reporting companies \1110\..........  Financial statements,         XBRL                  Filed as exhibit.
                                       including footnotes and
                                       schedules.
Security-based swap data              Financial statements,         XBRL                  Filed as exhibit.
 repositories \1111\.                  including footnotes and
                                       schedules.
Open-end management investment        Risk/return summaries.......  XBRL                  Filed as exhibit.
 companies, or mutual funds \1112\.
Nationally recognized statistical     Credit rating history.......  XBRL                  Posted on its Web
 rating organization (NRSRO) \1113\.                                                       site, with a link to
                                                                                           such location
                                                                                           included in an
                                                                                           exhibit to its annual
                                                                                           Form NRSRO.
----------------------------------------------------------------------------------------------------------------

The Commission requires certain registrants and other filers to provide 
certain information in XML or other machine-readable format. Asset-
backed issuers are required to provide asset-level disclosures in XML 
in their registration statements.\1114\ Forms D, filings required under 
Regulation A and Regulation Crowdfunding, and Section 16 ownership 
reports also require all or a part of the information to be filed using 
XML technology.\1115\ In addition, beginning in 2016, Regulation SBSR 
will require security-based swap data repositories to report and 
publicly disseminate in machine-readable electronic format certain 
security-based swap transaction information, although

[[Page 24006]]

the regulation does not specify a required format.\1116\ We are seeking 
public input on the use of structured data and other available 
standards and technologies that could enhance the quality of disclosure 
to investors while reducing burdens on registrants.
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    \1110\ Item 601(b)(101) of Regulation S-K [17 CFR 
229.601(b)(101)]; Interactive Data Release.
    \1111\ Exchange Act Rule 13n-11(f)(5) [17 CFR 240.13n-11(f)(5)]. 
See also 2015 Regulation SBSR Release.
    \1112\ Form N-1A [17 CFR 239.15A]; Rule 405 of Regulation S-T 
[17 CFR 232.405]. See also Interactive Data for Mutual Fund Risk/
Return Summary, Release No. 33-9006 (Feb. 11, 2009) [74 FR 7748 
(Feb. 19, 2009)] (``Interactive Data for Mutual Funds Release'').
    \1113\ Exchange Act Rule 17g-2(d) [17 CFR 240.17g-2(d)]; Form 
NRSRO [17 CFR 249b.300]. See also Amendments to Rules for Nationally 
Recognized Statistical Rating Organizations, Release No. 34-59342 
(Feb. 2, 2009) [74 FR 6456 (Feb. 9, 2009)] (adopting a public 
disclosure provision requiring NRSROs to make publicly available on 
their Web site in XBRL format a random sample of ten percent of the 
ratings histories of issuer-paid credit ratings and to disclose in 
Exhibit 1 to Form NRSRO the web address where the XBRL data may be 
accessed); Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Release No. 34-61050 (Nov. 23, 2009) [74 FR 
63831 (Dec. 4, 2009)] (requiring NRSROs to make publicly available 
on their Web site in XBRL format ratings history information for one 
hundred percent of their credit ratings initially determined on or 
after June 26, 2007).
    \1114\ Item 1111(h) of Regulation AB [17 CFR 229.1111(h)]; Rule 
11 of Regulation S-T [17 CFR 232.11]. Registrants will be required 
to comply with the asset-level disclosure requirements beginning in 
November 2016. See Asset-Backed Securities Disclosure and 
Registration, Release No. 33-9638 (Sept. 4, 2014) [79 FR 57184 
(Sept. 24, 2014)] (``2014 ABS Release'').
    \1115\ Form D [17 CFR 239.500]; Forms 1-A et seq. [17 CFR 239.90 
et seq]; Form C [17 CFR 239.900]; Forms 3, 4, & 5 [17 CFR 249.103-
105].
    See also Electronic Filing and Revision of Form D, Release No. 
33-8891 (Feb. 6, 2008) [73 FR 10592 (Feb. 27, 2008)] (noting that 
because Form D information consists of relatively simple facts, XML 
is a sufficient technological solution, and . . . the information 
tagged in XML [is expected to] be compatible with systems designed 
for more sophisticated XBRL reporting); 2015 Regulation A Release; 
Crowdfunding Adopting Release (stating that XML data will enable 
issuers to provide information in a convenient medium without 
requiring new technology and will provide the Commission and the 
public with readily available data about offerings made in reliance 
on Section 4(a)(6)).
    \1116\ Rule 900(cc) of Regulation SBSR [17 CFR 242.900(cc)].
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1. Comments Received
    S-K Study. One commenter recommended that the Commission assess the 
value of XBRL for new registrants and their industries and consider 
allowing voluntary, rather than mandatory, structuring of data by 
EGCs.\1117\ This commenter suggested that this would reduce initial 
compliance costs for EGCs and allow more time for the market to develop 
cost-effective XBRL tools, technologies and services.
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    \1117\ See Ernst & Young 1.
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    Disclosure Effectiveness Initiative. One commenter encouraged 
regulators, in light of advances in technology and connectivity and the 
ever-increasing demand for data, to look to technology to facilitate 
the capture, management, analysis, presentation, and delivery of 
information to investors. This commenter also noted that ``technology 
holds the promise of better (improved quantity and quality of), faster 
(improved timeliness of), and cheaper (improved access to) information 
for investors.'' \1118\ Another commenter stated that the ability to 
download financial tables and other data to better compare companies' 
disclosures across industries would appear to be particularly 
useful.\1119\ This commenter also noted, however, that the time it 
takes to prepare the XBRL filing may cause registrants to forego 
updates to its disclosure in the days prior to filing to allow time for 
data tagging, and suggested that the Commission explore technological 
solutions that avoid unnecessary duplication, such as modifying XBRL or 
using another data tagging system that is more cost and time-
efficient.\1120\
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    \1118\ See CFA Institute. See also CFA Report.
    \1119\ See ABA 3.
    \1120\ See id. (citing Emily Chasan, Costly Data Go Untapped, 
The Wall Street Journal, Jan. 22, 2013 (``Chasan''), available at 
https://blogs.wsj.com/cfo/2013/01/22/costly-data-go-untapped (noting 
that companies have invested in internal systems that they believe 
are superior to XBRL)).
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    One commenter supported the continued improvement of tagging and 
coding of financial reporting, noting that investors and regulators 
alike would benefit greatly from real time access to comparable, 
searchable and sortable data.\1121\ By contrast, another commenter 
indicated that XBRL data was not useful.\1122\ One commenter stated 
that XBRL data should not require with registration statements if it 
has been previously filed with a Form 10-K or Form 10-Q.\1123\
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    \1121\ See AFL-CIO.
    \1122\ See A. Radin (citing Chasan).
    \1123\ See letter from Fran Sesti (Feb. 1, 2016).
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    Several commenters, in a jointly submitted letter, provided a 
number of specific recommendations to enhance and modernize EDGAR, 
including enhanced functionality associated with structured data.\1124\ 
The recommendations included enhancements that would allow the user to 
save XBRL output more easily in Excel and identify tag extensions used 
by the registrant. Another commenter provided similar recommendations 
to modernize EDGAR and improve the Commission's data tagging framework 
and concurred with the jointly submitted letter.\1125\ In addition to 
longer term improvements, this commenter recommended that the 
Commission extend XBRL or other data tagging requirements to MD&A and 
other parts of filings.
---------------------------------------------------------------------------

    \1124\ See letter from Center for Audit Quality, et al. (May 29, 
2015).
    \1125\ See ABA 3.
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    One commenter recommended that the Commission require complete 
``non-dimensional'' financial statements to improve XBRL quality and 
usage.\1126\ This commenter also recommended that the Commission 
consider taking steps to improve the comparability of XBRL data by 
addressing inconsistencies in XBRL extensions. In addition, this 
commenter recommended expanding XBRL requirements, such as to earnings 
releases, MD&A, and proxy statements, and requiring filers to make all 
ownership-related filings available in an XML structured data format.
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    \1126\ See TagniFi.
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    One commenter encouraged the Commission to transform the current 
documents-based disclosure system to a system that collects, manages, 
and disseminates disclosure information as structured data with 
standardized tags and electronic formats.\1127\ This commenter argued 
that such a system would improve accountability to investors, allow 
public companies eventually to reduce compliance costs by automating 
reporting tasks, and improve the Commission's ability to use data 
analytics to review and evaluate registrants' submissions. As an 
initial step, this commenter recommended that the Commission adopt 
Inline XBRL to eliminate the duplication associated with providing the 
XBRL exhibit in addition to the text-based financial statements, and to 
``enforce'' the quality of XBRL filings.\1128\ The commenter further 
recommended that the Commission work with industry groups to set 
clearer data standards. This commenter also suggested that the higher 
cost to market participants of absorbing unstructured disclosure 
results in higher cost of capital to registrants, particularly smaller 
registrants.
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    \1127\ See Data Transparency Coalition.
    \1128\ We are considering whether to amend the current XBRL 
tagging requirements with respect to the financial statements of 
registrants to require the use of ``Inline XBRL.'' Inline XBRL would 
allow registrants to file the required information and data tags in 
one document rather than requiring a separate exhibit for the 
interactive data. Commission rules and the EDGAR system do not 
currently allow for the use of Inline XBRL. Any such proposal would 
be subject to public notice and comment as part of a separate 
rulemaking initiative. In this concept release, we seek comment on 
the benefits and costs of structured data generally and whether it 
would be appropriate to extend data tagging requirements to other 
Commission disclosures.
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2. Discussion
    The Commission requires registrants and other filers to provide 
certain information as structured data to facilitate the analysis and 
improve the accuracy of that information.\1129\ When the Commission 
first adopted rules requiring reporting company registrants to provide 
financial statement information in XBRL, it cited the potential of 
structured data to reduce the time required for registrants to prepare 
their disclosures, to increase the usability of disclosures for 
investors, and eventually to reduce costs for both registrants and 
investors, as structured data can help automate regulatory filings and 
business information processing.\1130\
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    \1129\ See, e.g., Rules 401-405 of Regulation S-T [17 CFR 
232.401 et seq.]; See also Interactive Data Release; What is 
Interactive Data and Who's Using It?, available at https://www.sec.gov/spotlight/xbrl/what-is-idata.shtml.
    \1130\ See Interactive Data Release (noting that interactive 
data, unlike static, text-based information, (1) can be dynamically 
searched and analyzed, facilitating the comparison of financial and 
business performance across companies, reporting periods, and 
industries, and (2) allows for the automation of regulatory filings 
and business information processing, with the potential to increase 
the speed, accuracy, and usability of financial disclosure and 
eventually to reduce costs); Interactive Data for Mutual Funds 
Release (stating the Commission's intent not only to make risk/
return summary information easier for investors to analyze but also 
to assist in automating regulatory filings and business information 
processing).
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    By requiring structured data, the Commission has sought to make 
disclosure easier for investors to access, analyze and compare across 
reporting periods, registrants, and industries.\1131\

[[Page 24007]]

When registrants provide disclosure items in a standardized data 
format, investors can more easily search and obtain specific 
information about registrants, compare common disclosures across 
registrants, and observe how registrant-specific information changes 
across reporting periods as the same registrant continues to file in a 
structured data format.\1132\ Additionally, data that investors can 
download, for example, from EDGAR, directly into a spreadsheet or 
statistical analysis software eliminates the need to enter the 
information manually, which minimizes the time burden and risk of 
errors associated with data entry.
---------------------------------------------------------------------------

    \1131\ See Interactive Data Release; Interactive Data for Mutual 
Funds Release.
    \1132\ See Concept Release on the U.S. Proxy System, Release No. 
34-62495 (July 14, 2010) [75 FR 42982 (July 21, 2010)].
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    In adopting Regulation AB requiring asset-level disclosures in XML, 
the Commission noted that requiring this information in a standardized 
machine-readable format makes the data transparent and 
comparable.\1133\ The Commission stated that it expected that this 
would lower the cost for investors of accessing, collecting and 
analyzing information, which would lead to better allocation of 
capital. In requiring the information in XML rather than XBRL, the 
Commission noted that the relatively simpler data to be presented in 
these disclosures, in contrast to the rich complexity of corporate 
financial disclosures, was well-suited for XML.\1134\
---------------------------------------------------------------------------

    \1133\ See 2014 ABS Release.
    \1134\ Id.
---------------------------------------------------------------------------

    Our rules requiring registrants to file financial and other 
information in a structured format require that data to be filed as an 
exhibit to the filing rather than embedded in the filing itself.\1135\ 
In this way, the structured data supplements but does not replace the 
traditional HTML electronic filing format. Having XBRL and other 
structured data submitted as a separate exhibit, however, has raised a 
number of issues regarding the accuracy and usability of the data.
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    \1135\ See, e.g., Item 601(b)(100) of Regulation S-K [17 CFR 
229.601(b)(100)]; Rule 401 of Regulation S-T [17 CFR 232.401].
---------------------------------------------------------------------------

    First, structured data filed as a separate exhibit does not look 
like the disclosure in the related HTML document submitted by the 
registrant unless specially rendered to do so with specialized 
software.\1136\ In an effort to make the XBRL data look more like the 
HTML document, some registrants create custom elements or dimensions or 
otherwise alter their XBRL documents. While our rules permit custom or 
company-specific element extensions for disclosures for which the 
standard U.S. GAAP taxonomy does not provide an appropriate element, 
the Commission and its staff have cautioned against custom elements for 
minor differences \1137\ or solely for formatting,\1138\ which can 
inhibit automated parsing processes and potentially create confusion 
between U.S. GAAP and company specific extension elements. The staff 
also has found that many registrants create custom axis extensions 
despite the availability of appropriate standard axis elements in the 
standard U.S. GAAP taxonomy, further diminishing data quality and 
impairing comparability across registrants and filings.\1139\ These and 
other potentially inappropriate uses of custom elements identified by 
Commission staff can affect the quality of the data and its potential 
use.\1140\
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    \1136\ See Staff Observations from the Review of Interactive 
Data Financial Statements (Dec. 13, 2011) (``December 2011 Staff 
Observations''), available at https://www.sec.gov/spotlight/xbrl/staff-review-observations-121311.shtml.
    \1137\ EDGAR Filer Manual, Vol. II, v. 35 (Dec. 2015) at 6-28.
    \1138\ See Regulation S-T Compliance and Disclosure 
Interpretations, Question 130.08 available at https://www.sec.gov/divisions/corpfin/guidance/regs-tinterp.htm. See also December 2011 
Staff Observations (encouraging registrants to concentrate on the 
quality of the tagging rather than trying to match the rendering of 
the XBRL exactly to the HTML filing and advising registrants not to 
create custom elements or use incorrect dates to achieve specific 
rendering results).
    \1139\ See Staff Observations of Custom Axis Tags (Mar. 29, 
2016) (``2016 Staff Observations''), available at: https://www.sec.gov/structureddata/reportspubs/osd_assessment_custom-axis-tags.html.
    \1140\ See id. See also, Staff Observations of Custom Tag Rates 
(July 7, 2014) (``2014 Staff Observations''), available at https://www.sec.gov/dera/reportspubs/assessment-custom-tag-rates-xbrl.html 
(in which, for a random sample of filings that staff reviewed, staff 
observed instances of filers creating custom axis tags unnecessarily 
when an appropriate standard axis tag existed in the U.S. GAAP 
taxonomy).
    An axis tag allows a filer to divide reported elements into 
different dimensions (e.g., revenue by geographical area, fair value 
measurement levels, components of total equity (e.g., common, 
preferred)). In a recent assessment of custom axis extensions use in 
XBRL exhibits, DERA staff reported that despite the overall decline 
in the use of custom tags generally, approximately 50% of filers 
continue to create custom axis tags, with large accelerated filers 
using custom axis tags more than twice as often as SRCs. DERA staff 
suggested that a contributing factor may be that SRCs likely have 
less complex financial disclosures that can be structured primarily 
using axis options provided by the U.S. GAAP taxonomy. See 2016 
Staff Observations.
    In a previous review of the use of custom tags in general in 
XBRL exhibits, the staff found a steady decline in custom element 
use by larger registrants, indicating improvements in the U.S. GAAP 
taxonomy and registrants' selections of tags. However, in contrast 
to the recent findings on axis extensions, the staff found that 
smaller filers were associated with an average custom tag rate 
almost 50% greater than that of larger filers. Staff analysis also 
revealed that some of the perceived quality issues associated with 
XBRL data are correlated with particular third-party providers of 
XBRL software and services, which may be, at least in part, due to 
continued innovation and growth in the market for filer software and 
services, resulting in offerings of varying functionality and ease 
of use. See id; 2014 Staff Observations.
---------------------------------------------------------------------------

    Second, the redundant process of preparing financial statements and 
periodic reports in HTML or ASCII and then preparing exhibits in XBRL 
creates a greater chance of data entry and other errors. Staff 
identified a number of errors, such as characterization of a number as 
negative when it is positive, missing amounts and calculations, and 
other inaccuracies,\1141\ which may occur more frequently, partially as 
a result of these redundant processes. Registrants often outsource the 
structuring of their XBRL reports, thereby adding incremental manual 
processes and controls to their efforts, which in turn can adversely 
affect the quality of XBRL-formatted disclosures.\1142\ Observers also 
have noted that XBRL data is not required to be audited, resulting in 
diminished investor confidence in the quality of the data.\1143\
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    \1141\ See, e.g., December 2011 Staff Observations; Staff 
Observations From Review of Interactive Data Financial Statements 
(Jun. 15, 2011), available at https://www.sec.gov/spotlight/xbrl/staff-review-observations-061511.shtml.
    \1142\ See Disclosure management: Streamlining the Last Mile, 
PricewaterhouseCoopers (Mar. 2012), available at https://www.pwc.com/gx/en/xbrl/pdf/pwc-streamlining-last-mile-report.pdf.
    \1143\ See Trevor S. Harris and Suzanne Morsfield, An Evaluation 
of the Current State and Future of XBRL and Interactive Data for 
Investors and Analysts--White Paper Number Three, Columbia Business 
School Center for Excellence in Accounting and Security Analysis, 
Dec. 2012, available at https://www8.gsb.columbia.edu/ceasa/sites/ceasa/files/An%20Evaluation%20of%20the%20Current%20State%20and%20Future%20of%20XBRL%20and%20Interactive%20Data%20for%20Investors%20and%20Analysts.pdf.

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    We continue to explore ways to incorporate structured data. We also 
continue to explore changes to the Commission's Web site and the EDGAR 
system that could enhance the usefulness of structured disclosures. For 
example, in December 2014, the Commission announced a pilot program 
under which data that registrants provide in structured formats would 
be combined and organized into structured data sets and posted for bulk 
downloads on the Commission's Web site for use by investors and 
academics.\1144\
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    \1144\ See SEC Announces Program to Facilitate Analysis of 
Corporate Financial Data (Dec. 30, 2014), available at https://www.sec.gov/news/pressrelease/2014-295.html; Financial Statement 
Data Sets, available at https://www.sec.gov/dera/data/financial-statement-data-sets.html.
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    Concerns have been raised about the costs and time burden 
associated with structured data requirements. For example, the ACSEC 
has focused on the costs of structuring disclosures and

[[Page 24008]]

asserted that the requirements impose a disproportionate burden on 
smaller registrants in terms of cost and time.\1145\ As discussed 
above, both ACSEC and the Small Business Forum have recommended that 
the Commission exempt SRCs from the requirement to provide financial 
information in XBRL.\1146\ In its own structured data recommendation, 
the Investor Advisory Committee generally supported structured data but 
acknowledged the costs of data tagging and recommended that the 
Commission take steps to reduce these costs, particularly for smaller 
registrants and investors.\1147\ According to a 2015 AICPA study, 
however, XBRL filing costs for smaller registrants were lower than 
initially expected and have been decreasing since the 2009 inception of 
the Commission's Structured Data Program.\1148\
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    \1145\ See 2015 ACSEC Recommendations; 2013 ACSEC 
Recommendations.
    \1146\ See Section IV.H.2.b.
    \1147\ See IAC Data Tagging Recommendations.
    \1148\ See American Institute of CPAs, Research Shows XBRL 
Filing Costs Lower than Expected (Jan. 2015), available at https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/xbrl/pages/xbrlcostsstudy.aspx.
---------------------------------------------------------------------------

    We acknowledge that registrants may incur costs to provide 
disclosure in structured data format, particularly initial set-up 
costs. We seek public comment on ways to minimize the costs of 
providing structured disclosures, particularly over time, while still 
realizing the intended benefits to investors and other users of such 
disclosures.
3. Request for Comment
    330. How can the quality of structured disclosures be enhanced?
    331. Are there changes to the EDGAR system that the Commission 
should make to render the structured disclosure filed by registrants 
more useful?
    332. Are company-specific custom extensions, such as element or 
axis extensions, useful to investors or other users of structured 
disclosures? If so, how might these custom extensions be made more 
useful for enhancing automated analysis? If not, are there better ways 
to express disclosures that are unique to a company (e.g., business 
segment, product line)?
    333. Should we require registrants to provide additional 
disclosures in a structured format? If so, which disclosures? For 
example, are there categories of information in Parts I and II of Form 
10-K or in Form 10-Q that investors would want to receive as structured 
data?
    334. To the extent that we consider additional structured data 
requirements for disclosure in periodic reports, what level of 
structured data requirements would be appropriate? For example, should 
we require registrants to identify sections, sub-sections or topics 
with ``block text'' labels, or should we require registrants to 
structure numeric elements and tables individually? What would be the 
challenges and costs of such an approach? What would be the benefit?
    335. How does the availability of structured data in registrants' 
periodic reports affect the timeliness, efficiency, or depth of 
investors' review of disclosures? How do the effects of structured 
disclosure requirements vary across investor types? Are there other 
methods of structuring disclosures that would make disclosures more 
accessible or useful?
    336. To what extent is the information currently provided in 
structured disclosures readily available through other sources, such as 
third-party data aggregators? What are the costs and benefits to 
investors of obtaining this data from such third parties rather than 
through the use of structured disclosures filed by registrants?
    337. To what extent do investors, analysts, third-party data 
aggregators, or other market participants rely on structured data 
provided by registrants in their periodic reports? What specific 
content in structured disclosures is useful to each of these groups?
    338. Are there other ways in which our requirements can improve the 
accuracy of tagged data? What would be the challenges to registrants 
posed by such alternatives?
    339. Are there certain categories of registrant for which we should 
provide an exemption from some or all structured disclosure 
requirements, require more limited information to be tagged, or require 
a different presentation of this information? Why or why not? If so, to 
which registrants or structured disclosure requirements should such 
exemptions apply?
    340. In requiring structured data, the Commission has sought to 
make disclosure easier for investors to access, analyze and compare 
across reporting periods, registrants, and industries.\1149\ Are there 
other technologies that could make disclosure easier for investors to 
access, analyze and compare? If so, how should we incorporate these 
technologies into our disclosure requirements?
---------------------------------------------------------------------------

    \1149\ See supra notes 1130 to 1131.
---------------------------------------------------------------------------

VI. Conclusion

    We are interested in the public's views on any of the matters 
discussed in this concept release or on the staff's Disclosure 
Effectiveness Initiative. We encourage all interested parties to submit 
comment on these topics. If possible, please reference the specific 
question numbers or sections of the release when submitting comments. 
In addition to investors and registrants, the Commission welcomes 
comment from other market participants and particularly welcomes 
statistical, empirical, and other data from commenters that may support 
their views and/or support or refute the views or issues raised. We 
also solicit comment on any other aspect of our disclosure requirements 
in Regulation S-K that commenters believe may be improved upon. Please 
be as specific as possible in your discussion and analysis of any 
additional issues.

    By the Commission.

    Dated: April 13, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-09056 Filed 4-21-16; 8:45 am]
 BILLING CODE 8011-01-P