The SEC has proposed rule amendments that would require companies that file registration statements and periodic and current reports to include hyperlinks to each exhibit listed in the exhibit index of their filings (in a more subtle change, the index would be required to appear before the signatures rather than simply appearing before the exhibits as is current required). All filings will need to be submitted in HTML format.  

The practical impact of these amendments, if approved, would be to make it much more efficient to locate exhibits, particularly those incorporated by reference. For example, under current rules if an investor wants to find a company's bylaws on EDGAR he or she must locate the bylaws on the exhibit list (such as in the most recent 10-K or 20-F) which will list the filing with which the bylaws were most recently filed. He or she must then separately locate that filing. Hyperlinking would effectively eliminate the second step, saving time.

The SEC has announced that in fiscal year 2017 the fees that public companies and other issuers pay to register their securities with the Commission will be set at $115.90 per million dollars.  This change, which will begin on October 1, 2016, is an increase from the current rate of $100.70 per million dollars.

Click below for more SEC filing requirements and obligations of directors, officers and principal stockholders of a publicy held companies.

Yesterday, the SEC proposed amendments to eliminate redundant, overlapping, outdated, or superseded provisions, in light of subsequent changes to SEC disclosure requirements, U.S. GAAP, IFRS and technology. The SEC also solicited comment on certain disclosure requirements that overlap with U.S. GAAP to determine whether to retain, modify, eliminate or refer them to the FASB for potential incorporation into U.S. GAAP. The proposing release is part of the SEC’s disclosure effectiveness review (criticized of late by Senator Warren), which is a broad-based staff review of the requirements, and the presentation and delivery of disclosures that companies make to investors. The proposals are also part the implementation of the Fixing America’s Surface Transportation (FAST) Act, which, among other things, requires the SEC to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary. The proposals are subject to public comment and may or may not be enacted in the near-term, but many of them appear to be “low hanging fruit” that are common-sense, non-controversial changes that would help public companies to at least start to chip away at their bulging disclosure documents. While not radical changes, it’s a step in the right direction to see some of the simplification concepts the SEC has discussed for months start to move to the proposal stage.

Find more SEC resources on our Capital Markets page.

This interview was originally published on Sharon Merrill's blog, The Podium. It is republished here with permission.

On May 17, 2016, the SEC issued new Compliance & Disclosure Interpretations related to Regulation G.  The Podium discussed the new guidance on the reporting of non-GAAP financial measures with Sullivan Partner Howard Berkenblit. 

The Podium: What do you see as the most significant changes that came out of the new SEC guidance on Reg G?

HB: There are two main themes to the changes.  First there are some additional interpretations regarding what can and can’t be presented – these have the practical effect of creating new rules without technically changing the rules.  For example, one of the changes makes explicit that EBITDA “must not be presented on a per share basis,” while others give new examples of adjustments that may not be made to non-GAAP measures. While some of these were implicit from the rules or prior SEC Staff speeches and comments, having them in Compliance and Disclosure Interpretations, even if theoretically not binding, gives them greater weight.

The second theme revolves around changes to presentation.  These interpretations don’t directly prohibit a measure or adjustment, but do dictate the way the information appears. For example, while many companies’ quarterly earnings releases lead with a non-GAAP measure and only describe the comparable GAAP measure later in the release, that will no longer be acceptable under the new interpretations, which put tighter parameters around the presentation. 

The Podium: Can you give examples of the most common mistakes companies make in presenting non-GAAP financial measures?

HB: While the concept of giving equal or greater prominence to GAAP measures over non-GAAP measures is not new, the interpretations now give several specific examples of ways in which the presentation of non-GAAP measures have been presented more prominently than the GAAP measures in violation of Reg G. These include (1) a non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption); (2) omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures, and (3) describing a non-GAAP measure as, for example, "record performance" or "exceptional" without at least an equally prominent descriptive characterization of the comparable GAAP measure. Many companies will need to modify the way they draft their disclosures.

The Podium:  How are you advising clients on developing headlines in earnings releases as it pertains to Reg G?

HB: While non-GAAP measures can still appear in headlines, companies can no longer present them alone or before GAAP measures.  As a result of the interpretations, it’s clear now that the SEC expects any headline that contains a non-GAAP measure to only have that measure appear if the most directly comparable GAAP measure also appears and precedes it.   So essentially clients must lead with the GAAP measure.  For example, a headline that used to say “EBITDA increases 20% For Quarter” will now need to read along the lines of “Net Income increases 10% for Quarter; EBITDA increases 20%”.

The Podium: Were there areas that the SEC advised that they will be watching more closely as it relates to Reg G?  Where have companies been skirting the Regulation to date?

HB: The SEC seems to be most bothered by adjustments to non-GAAP measures that could appear to be misleading. The examples most often given in speeches and the press seem to be more clear cut abuses – for example, backing out certain cash items from a cash-based performance measure, accelerating revenue or presenting only the “good stuff’ while leaving out conspicuous negative adjustments. In my experience most companies present non-GAAP adjustments that are appropriate and because they show how management views the measure and give investors and analysts valuable additional information. But because of the abuses, the SEC felt the need to clamp down a bit not just on the more extreme examples, but in some cases more common practices as well.

The Podium: Do you expect the SEC to become more strict with enforcement of Reg G?  Should we expect to see issuers receive an increase in comment letters on filings related to Reg G?

HB: The SEC Staff has already begun to increase its comments on filings and I expect that will continue in the near future, now more directly pointing to the new interpretations as the basis for the comments. Companies are clearly expected to familiarize themselves with the interpretations and apply them and change any existing practices that don’t comply.  In terms of more severe consequences, I am hopeful that the SEC enforcement staff will only get involved in cases where companies take deliberate actions to mislead or defraud.  

The Podium:  Do you expect the SEC to get more strict with Reg G in communications other than filings, such as conference calls and presentations?

HB: For a while now, as part of its regular reviews, the SEC has been looking outside the four corners of the registration statement or periodic filing to earnings releases, websites, presentations, etc.  I expect this will continue – the SEC Staff in particular looks for inconsistencies in disclosures and non-GAAP measures play directly into this. For example, if a quarterly report on Form 10-Q presents financial information that indicates a mediocre quarter, but the parallel earnings release includes non-GAAP measures that appear to give a much rosier picture, companies should not be surprised to get questions from the Staff about the different trends.

The Podium: What are the key take-aways for issuers on the new guidance?

HB: The key is that anyone involved in preparing earnings releases, presentations or SEC filings that contain non-GAAP financial measures should read the guidance and make sure they understand it before the next disclosure event. Beyond that, any time a company is considering changes to how it calculates or presents non-GAAP financial measures, the measures and presentation should be analyzed against these interpretations, as well as recent SEC comments on other similarly situated companies and more generally in public appearances. Consistency is also very important – in the interpretations, the SEC Staff has made clear that it expects period-to-period comparisons to present the same types of information – the same adjustments, fairly presenting the negative with the positive, and not excluding recurring items.

Howard E. Berkenblit is a partner and leader of Sullivan’s Capital Markets Group. He specializes in counseling both public and private companies involved in equity and debt financings and ongoing corporate governance and disclosure matters, stock exchange listing standards and Sarbanes-Oxley Act and Dodd-Frank Act compliance. He also advises Israeli and other international companies that seek to have their securities traded in the United States, as well as real estate investment trusts that engage in securities offerings and governance initiatives. In addition, Howard works with clients on mergers and acquisitions, capital raising and general corporate matters. He has written articles and spoken on many topics including Sarbanes-Oxley, Dodd-Frank and a range of securities law issues impacting U.S. and foreign companies. He is also the editor of The SEC Pulse, a blog that provides updates and commentary from Sullivan’s Capital Markets Group on issues affecting publicly traded and privately owned businesses, investment banks and foreign companies that trade or raise capital in the United States, and boards of directors and company officers in securities transactions and corporate governance matters. 

The SEC has approved an interim final rule that allows Form 10-K filers to provide a summary of business and financial information contained in the annual report. The rule implements a provision of the Fixing America’s Surface Transportation (FAST) Act. Note that this will be optional for companies – they do not have to provide a summary but the idea behind this is that a summary may help investors better digest the lengthier and lengthier annual reports they have been receiving lately. Importantly, however, companies opting to provide the summary must include hyperlinks to the related, more detailed disclosure in the Form 10-K. 

The SEC staff has released updated Compliance Disclosure and Interpretations regarding Regulation G/non-GAAP financial measures. Non-GAAP measures have been under attack in recent SEC speeches and media articles and now there are updated parameters surrounding their usage. 

From a practical standpoint, the biggest changes in the CD&Is appear in new question 102.10 –this will impact many companies’ earnings releases due to the parameters it places around ordering, headlines, etc. This CD&I points out that the rules require that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence.  Included among the examples of disclosures that would cause a non-GAAP measure to be more prominent are some practices that are currently quite common, including (1) a non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption); (2) omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures and (3) describing a non-GAAP measure as, for example, "record performance" or "exceptional" without at least an equally prominent descriptive characterization of the comparable GAAP measure. 

Although the CD&Is are technically informal views, not rules, companies can expect the SEC staff to comment on their filings that contain non-GAAP measures if they don’t adhere to the updated guidance.

Not that it was all that difficult to begin with, but the SEC has released an online tool to help companies calculate registration fees for certain form submissions to EDGAR. According to the SEC’s press release, “the new tool is intended to improve the accuracy of fee calculations and minimize the need for corrections.” The new tool covers the most common filings companies use to register initial public offerings, debt offerings, asset-backed securities, closed-end mutual funds, limited partnerships, and small business investment companies. The tool prompts users to enter data based on the type of filing and the applicable fee rules and provides suggestions for completing required fee tables based on the data entered. Of course, the SEC reminds filers that this is just a tool to help - companies will remain responsible for paying all required fees and accurately including all required information in their filings.

The Registration Fee Estimator is available at https://www.sec.gov/ofm/registration-fee-estimator.html

In mid-February, the SEC posted an investor bulletin designed to educate investors about the ins and outs of its crowdfunding rules that go into effect in mid-May.  The bulletin presents examples illustrating the investment limits based on income and net worth under the new rules.  The bulletin also contains guidance on how to make a crowdfunding investment and how to get information about companies seeking crowdfunding, and highlights some of the key risks involved with a crowdfunding investment, all in a fairly “plain English” format.

As described in our client advisory, the recently enacted FAST Act required the SEC, within 45 days, to revise Form S-1 (and F-1) to permit any smaller reporting company to incorporate by reference in a Form S-1 any documents that the company files with the SEC after the effective date of its registration statement. The SEC today adopted “interim” rules to implement this FAST Act provision, as well as another provision permitting the omission by emerging growth companies of certain historical financial information in offering documents. The interim rules can be found here and also request public comments on whether they should be further expanded in coverage. 

Under current rules, for ongoing offerings or resale registrations, a company that is not eligible to use Form S-3 must continually amend or supplement its Form S-1 registration statement. The new interim rule gives smaller reporting companies the option of automatic updates through periodic reports filed by the company, thus eliminating the time and effort to prepare mostly duplicative separate filings that formerly were needed to update Form S-1. There are a few eligibility conditions, such as having filed an annual report for the most recently completed fiscal year and having filed all required periodic reports during the preceding 12 months. In addition, incorporated reports must also be included on the smaller reporting company’s website and be available upon request. 

In December 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (FAST Act). Buried in the hundreds of unrelated pages of the FAST Act are several provisions that modify the previously adopted Jumpstart Our Business Startups Act (JOBS Act). The FAST Act impacts capital raising for emerging growth companies (EGCs), seeks to simplify disclosure requirements for reporting companies, codifies a previously informal exemption from registration for resales of securities and streamlines the registration process for smaller reporting companies. The key securities provisions of the FAST Act are summarized below.

Click below to read the complete Client Advisory, co-authored by Sullivan attorneys Howard Berkenblit, Rob Condon, Jeff Morlend and Avi Rao.