The SEC recently published final rules that allow publicly traded bank holding companies and banks to simplify their public disclosures and provide more meaningful information to investors. Most of the rules become effective on May 2, 2019, which allow many registrants to benefit from them on their Form 10-Q filings for the quarter ended March 31, 2019.
This post is intended to highlight those changes that we expect to be most significant to registrants in the banking industry. BCLP has also produced a more thorough summary of the final rules as applicable to all registrants. The complete, 252-page adopting release is available here.
Most registrants provide three years of MD&A narrative. The new rule allows such registrants to omit discussion of the earliest of the three years if such discussion was previously filed, so that the 10-K MD&A will address only the year being reported and the previous year. Smaller reporting companies are only required to provide two years of financials and MD&A (and emerging growth companies are allowed to omit periods prior to their IPO), so these registrants will not see any benefit from this change.
The revisions to the MD&A requirements also eliminate the requirement that issuers provide a year-to-year comparison. In the related commentary in the adopting release, the SEC characterizes this change as providing registrants flexibility to tailor their presentation. Hopefully, over time, the SEC’s expressed purpose will encourage creative approaches to this area.
Exhibits – Material Contracts
Previously, a two year “lookback” applied, such that material contracts entered into in the two years prior to the filing were required to be disclosed on the exhibit index even if the contracts had been fully performed. A common example is merger agreements—companies are currently required to continue to file merger agreements as exhibits even after closing. The new rule eliminates this requirement (other than for newly public companies), such that material contracts that have been fully performed are no longer required to be disclosed.
Exhibits – Schedules and Exhibits to Contracts
Previously, Regulation S-K Item 601 did not allow companies to omit schedules and exhibits to material contracts other than for merger agreements, for which Regulation S-K 601(b)(2) allows for exclusion of schedules and exhibits that are not material to an investment decision. In practice, many companies applied this materiality analysis to contracts other than merger agreements, although this practice was not endorsed by the SEC. The new rule effectively adopts this practice for all material contracts.
Exhibits – Confidentiality
The new rule allows companies to redact–without filing a confidential treatment request–portions of agreements (or exhibits or schedules) if disclosure of such information would cause competitive harm. Although this change is favorable, its impact is limited in light of the new rule allowing non-material schedules and exhibits to be omitted (discussed above). This rule would be most beneficial to a company that discovered at filing time that certain information in an executed agreement (rather than in the schedules) should be confidential.
The final rule requires disclosure of physical property only if such property is material, and it allows for a more collective disclosure of such property. In practice, this will likely lead to many banks replacing a listing of branches and other physical locations with a summary.
In addition to those significant changes above, the following are technical changes that banks should be aware of:
- Registrants will now be required to show each class of securities, their exchange and ticker on the cover page
- Registrants should add an exhibit to their 10-K describing their securities (many companies refer to the most recent description of securities appearing in a registration statement).
- The 10-K checkbox for delinquent Section 16 filings is going away. Companies may omit the “Delinquent Section 16(a) Reports” section from the proxy if they have nothing to disclose.
- Certain undertakings in Section 512(c)-(f) have been revised.