In March 2019, the SEC adopted final rules to simplify the disclosure requirements companies with the intent to reduce repetition, reduce costs and burdens to registrants, focus disclosure on material information and improve readability.

One of the most significant changes deals with Item 303 of Regulation S-K, which covers the management’s discussion and analysis (MD&A) of a public company’s financial condition. The final rule allows companies to generally omit the earliest of the three years in MD&A if they have already included the discussion in a prior filing.

The rules also modify confidential treatment of certain disclosures in Item 601, required disclosures related to locations and character of physical properties, risk factor disclosure requirements under Item 503(c), among other things.

The rule will become effective 30 days after publication in the Federal Register, which normally occurs a few weeks after a release is posted on the SEC’s website.

Senate Legislation Would Provide Small Companies with Exemption from Sarbanes-Oxley Attestation Requirements

A bipartisan group of senators has introduced a new bill, the Fostering Innovation Act of 2019, that would amend the Sarbanes Oxley Act of 2002 (SOX) to provide a temporary exemption from the auditor attestation requirements of Section 404(b) for low-revenue issuers, such as biotech firms. The bill is designed to help emerging growth companies (EGCs) that will lose their exemptions from SOX 404(b) five years after their IPOs, but still do not report much revenue. For those companies, proponents contend, the auditor attestation requirement is time-consuming and expensive, diverting capital from other critical uses, such as research and development. The bill would provide a very narrow fix that temporarily extends the SOX 404(b) exemption for an additional five years for a small subset of EGCs with annual average revenue of less than $50 million and less than $700 million in public float.

This issue has also been considered at a meeting of the Securities and Exchange Commission (SEC) Committee on Small and Emerging Companies, And the Commissioners themselves have been divided on the advisability of retaining the SOX 404(b) requirement for smaller companies. To further consider that issue, SEC Chairman Jay Clayton last year directed the staff to come up with potential amendments to reduce the number of companies subject to SOX 404(b), while maintaining appropriate investor protections. Potential beneficiaries of relief, according to Clayton, are companies with little or no revenue.  In those cases, he asserted, the money that would otherwise be used for the SOX 404(b) attestation could instead be used to hire new scientists to advance life-enhancing or life-saving developments.

SEC Proposes to Expand “Test-the-Waters” to All Issuers

In February, the SEC proposed to expand the “test-the-waters” accommodation—currently available to emerging growth companies—to all issuers, including investment company issuers. The proposed rule and related amendments under the Securities Act of 1933 would enable all issuers (and its authorized representatives, including underwriters) to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers and institutional accredited investors.

In the SEC’s press release announcing the action, SEC Chairman Jay Clayton said, “Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies.” Chairman Clayton added, “I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”

Under proposed Securities Act Rule 163B:

  • There would be no filing or legending requirements
  • Test-the-waters communications may not conflict with material information in the related registration statement issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposal will have a 60-day public comment period following its publication in the Federal Register.

Winter 2018 Issue of Supervisory Insights Now Available (FIL-13-2019)

The winter issue of Supervisory Insights is now available. This issue examines the future of, and alternatives to, the London Inter-bank Offered Rate (LIBOR) and also provides an overview of recently released regulations and other items of interest.

FDIC Proposes Revision to Apply the CBLR Framework for Regulatory Capital (FIL-6-2019)

In February, the FDIC published a Notice of Proposed Rulemaking (NPR) that would apply the Community Bank Leverage Ratio (CBLR) framework. The CBLR is a simplified measure of capital adequacy and the framework would allow qualifying community banking organizations to complete a simpler regulatory capital schedule on the Consolidated Reports of Condition and Income (Call Report). Specifically, qualifying community banking organizations that elect to use the proposed CBLR framework (CBLR banks) no longer would be required to report certain data on the Call Report, including tier 1 capital and the tier 1 leverage ratio.

The NPR also would change the calculation of the assessment base and assessment rate of a CBLR bank using the regulatory capital items under the proposed framework; however, the NPR would provide a CBLR bank with the option to continue to use tier 1 capital, the tier 1 leverage ratio, or both, for assessments purposes.

To assist banks in understanding the effects of the NPR, the FDIC has provided a spreadsheet tool that estimates deposit insurance assessment amounts under the NPR (using data as of September 30, 2018).

Comments on the NPR will be accepted for 60 days after publication in the Federal Register.

Additional Information

The above article is a part of a report we provide each quarter with up-to-date information for consideration in your financial reporting and disclosures. Our goal is for you to have current, relevant information available.

See the full report here:

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