With 2018 behind us, it is time to look ahead to the 2019 reporting season. This advisory highlights some of the changes, new rules, and “best practices” from 2018 that SEC reporting companies will need to address in 2019.
I. Form 10-K
A. Changes to Form 10-K Cover Page
B. Disclosure Simplification
Financial information about a company’s business segments and discussion of changes to these segments and interim segment performance is no longer required in the “Business” section of Form 10-K. Additionally, companies do not need to disclose the amount expended on company-sponsored research and development. Finally, the SEC has removed the requirement that a company disclose a geographic breakdown of revenues and assets, and a cross-reference to such disclosure in the notes to financial statements is no longer required.
ii. Public Reference Room Reference and Website Disclosure
The SEC no longer requires companies to include references to the Public Reference Room in the Form 10-K. Instead, the SEC encourages investors themselves to use the internet to locate materials and documents filed with the SEC. To assist investors in locating such filings, companies must disclose their website addresses in the Form 10-K.
iii. Market Price Information Disclosures
Companies are no longer required to disclose the high and low trading prices of their common stock in the last two years in the Form 10-K. Companies with one or more classes of common stock must continue to identify the markets on which each class is traded and corresponding trading symbols.
iv. Selected Financial Data Reporting
Companies who have adopted the new revenue recognition standard (ASC 606) using the full retrospective method are not required to apply this new standard when reporting selected financial data for periods prior to those reported in the financial statements that are adjusted on a retroactive basis. Nevertheless, companies must still describe any factors that materially affect the comparability of the selected financial data to these financial statements. These factors may include accounting adjustments or changes to business structure.
v. Ratio of Earnings to Fixed Charges
The new rules have eliminated the ratio of earnings to fixed charges disclosure and exhibit because U.S. GAAP and IFRS require disclosure of many of the components commonly used in the ratio (e.g., income, interest expense, lease expense) as well as information from which other ratios may be computed that convey reasonably similar information about an issuer’s ability to meet its financial obligations.
vi. Critical Audit Matters
The PCAOB adopted a new auditor reporting standard that requires more information about the audit, including critical audit matters. The new standard will be applicable for large accelerated filers for audits of fiscal years ending on or after June 30, 2019.
C. Risk Factor Disclosures
Companies continue to enhance risk factor disclosures, particularly with respect to certain economic and other developments, including Brexit, LIBOR and cybersecurity threats. Companies should consider adding risk factors, to the extent applicable to their business or industry, with respect to the implementation and effect of Brexit, changes in interest rates, methods for determining or potential replacement of LIBOR, and cybersecurity threats and cyber incidents.
D. Issuer Status
The SEC recently adopted rules revising the qualifications for a registrant to qualify as a smaller reporting company (an “SRC”) and eligibility for scaled disclosure requirements applicable to SRCs. Registrants may qualify as SRCs if they have a public float of less than $250 million (increased from $75 million). Additionally, even if a registrant does not qualify as an SRC, it may provide scaled disclosures if the registrant does not have a public float or has a public float of less than $700 million but has revenues that do not exceed $100 million (increased from $50 million). However, it is important to note that SRCs with a public float of $75 million or more still will be considered “accelerated filers” and will remain subject to reporting deadlines applicable to accelerated filers.
II. Proxy Statement Drafting
Shareholder groups and corporate governance advocates continue to seek enhanced disclosures in a number of areas. Among these are board diversity, specifically disclosures about how the board evaluates diversity. While not required, companies should consider including a director skills matrix in their proxy statements to provide greater transparency into this evaluation process. Also, there is an expectation that greater emphasis will be placed on environmental, social and governance matters, including how companies address climate risk and gender diversity.
Furthermore, the SEC recently published interpretive guidance related to cybersecurity risks and incidents. Companies should consider disclosures on their cybersecurity risk management programs and how their boards of directors engage with management on cybersecurity matters. Insider trading policies should be updated to clarify that cyber-related incidents may be material, non-public information.
B. Emerging Growth Company Considerations
A company will be required to expand certain portions of its proxy statements if its status as an emerging growth company (an “EGC”) will terminate as of the end of the current fiscal year. First, the company will be required to provide a complete Compensation Discussion and Analysis section (“CD&A”) and a full executive compensation disclosure for up to five named executive officers as required by SEC regulations, as compared to the limited disclosure applicable only to the principal executive officer and two other highest paid executive officers of an EGC. Moreover, the company will be required to hold a say-on-pay vote for executive compensation. Finally, pay ratio disclosure will be required to be included in the proxy statement following the first full fiscal year in which the company is not an EGC.
C. Pay Ratio Disclosure Review
As the first year of pay ratio disclosure is behind us, companies should review the practices utilized and assumptions applied in calculating their pay ratio disclosures to see if improvements may be made to make the calculation processes more accurate and efficient. Companies also should review the pay ratio disclosures of their peers to determine any material differences in how these companies calculated their disclosures, as investors who review this disclosure are likely to compare a company’s pay ratio disclosure against those of its peers. Regardless of how a company prepares the pay ratio disclosure, companies should continue to place the disclosure outside of the CD&A.
D. Section 162(m) Disclosure Review
The Tax Cuts and Jobs Act eliminated the “qualified performance-based compensation” exception under Section 162(m) of the Internal Revenue Code. Due to this amendment, a company’s CD&A will likely need to be updated. The IRS has issued guidance on certain aspects to the amendments to Section 162(m) regarding how a written binding contract in place on November 2, 2017 that is not materially modified can qualify as “grandfathered” with respect to the amended Section 162(m). Specifically, agreements that provide for negative discretion to reduce compensation may not qualify as “grandfathered,” and a “grandfathered” employment agreement that provides for automatic renewal at the end of the term generally loses its “grandfathered” status for amounts earned after the renewal date.
E. Equity Plan Assessment
On an annual basis, companies should evaluate their equity plans to confirm that there are sufficient shares for planned grants in the upcoming year. Also, companies should ensure that all of the shares have been properly registered with the SEC and that the form of award agreements and other documents have been properly filed as required by SEC and applicable stock exchange rules.
III. SEC Developments
A. Hedging Policy Disclosures
The SEC has approved final rules that will require disclosure of any company practices or policies that allow employees or directors to engage in hedging with respect to a company’s equity securities. Companies will be required to fully disclose the relevant practices or policies or provide a summary of these practices or policies that specify the hedging transactions that are allowed or prohibited. The rules will apply to proxy statements for fiscal years beginning after July 1, 2019. For EGCs, the rules will become effective for fiscal years beginning after July 1, 2020.
B. Form 10-Q Comments
The SEC is seeking comments regarding how to promote efficiency in the preparation of quarterly reports on Form 10-Q. The SEC would like to reduce duplication of information disclosed between Forms 10-Q and the earnings releases furnished on Form 8-K. Specifically, the SEC would like to evaluate the effect that elimination of such duplication could have on capital information and investor protection. Additionally, the SEC is considering the frequency of such periodic reporting.
C. Regulation A Exemption
Although the Regulation A exemption from securities registration was previously unavailable to Exchange Act reporting companies, the SEC has adopted rules that allow reporting companies to utilize Regulation A. The thresholds for the exemption will remain the same, as offerings of securities of up to $50 million in a 12-month period may be eligible for the exemption. Offerings conducted pursuant to Regulation A are not integrated with prior offers or sales of securities, or subsequent offers or sales of securities that are made more than six months after the completion of the Regulation A offering.
For more information on the matters discussed in this advisory, please contact Mark Reuter, Jim Kennedy, Allie Westfall or Brett Niehauser. To ensure that you are current on recent activities, subscribe to our Corporate and Securities Blog by entering your email address in the sidebar at http://corporate-securities.kmklaw.com/.
 These changes apply to all SEC filings.
 Regulation S-K, Item 301 Instruction 2.
 Regulation S-X, Rule 3-05(b)(2)(iv).
 Exchange Act Rule 12b-2.
KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.
© 2021 Keating Muething & Klekamp PLL. All Rights Reserved
Mark Reuter advocates for business clients in transactions, proceedings and conflicts regulated by federal and state securities laws and stock exchange rules. A partner in the firm’s Business Representation & Transaction ...
Jim Kennedy practices in the Business Representation & Transactions Group. The focus of his practice is corporate, securities, and financing law, where he has extensive experience in mergers, acquisitions and ...
As a partner in the firm’s Business Representation & Transactions Group, Allie Westfall’s insight and proven analytical skills help translate the complexities of the often-challenging securities laws. Allie’s counsel ...
- Securities Law
- Securities Regulation
- Tax Planning
- Corporate Law
- Corporate Tax
- Paycheck Protection Program
- Proxy Access Rules
- Securities Litigation
- FAST Act
- JOBS Act
- Private Offerings
- Cybersecurity and Privacy Law
- SEC Enforcement
- Consumer Protection Act
- Corporate Governance
- Real Estate Law
- Conflict Minerals
- Ohio LLC Act
- Emerging Growth Companies
- Intellectual Property
- Pay Ratio Disclosure
- Opportunity Zone
- Mergers & Acquisitions
- Accredited Investors
- Sales Tax
- United States Supreme Court
- Online Trading Platforms
- Registration Statement
- Executive Compensation
- Health Care Act
- Annual Reports
- Ohio Foreclosure Reform
- Family-Controlled Entities
- Gift and Estate Transfers
- Director Compensation
- Wall Street Reform
- Board of Directors
- Director Independence
- Clawback Rules
- Total Shareholder Return
- Cyber Insurance
- Data Breach
- Receivership Statute
- Regulation A
- Regulation D
- Business Process Improvement
- Employer Policies
- Employment Litigation
- Labor & Employment Law
- Labor Law
- Sixth Circuit
- Compensation Committee Certification
- CDFI Fund
- Community Development Entities
- Community Development Financial Institutions Fund
- Government Shutdown
- New Markets Tax Credit
- NMTC Financing
- Regulation Fair Disclosure
- Social Media
- Healthcare Reform
- Public Company Transition Rules
- Employment Incentives
- HIRE Act
- Social Security Tax
- Tax Credit
- Update: SEC Postpones Decision on Nasdaq's New Listing Rules to Advance Board Diversity
- SEC Charges AT&T and Three Executives with Regulation FD Violations
- Stimulus Package Reverses IRS’s Position on Deductibility of PPP Expenses and Other Loan Forgiveness Issues
- Nasdaq Proposes New Listing Rules to Advance Board Diversity: Comply or Explain
- More Disclosure Modernization: SEC Adopts Significant Amendments to Financial Disclosure Rules
- SEC Eases Limits and Rules on Private Offerings
- SEC Proposes Conditional Exemption for "Finders" Involved in Capital Raising
- Ohio Adopts Protections for Ohio Businesses from Coronavirus - Related Lawsuits
- SEC Scales Back Financial Disclosures for Business Combinations
- State of Ohio Issues Urgent Health Advisory and Partial Rescission of “Stay at Home” Order