At an open meeting March 11, The Securities and Exchange Commission voted to adopt additional reporting requirements on Form 8-K.
The amendments will add 10 disclosure items to Form 8-K, including the transfer of two items to the current report from the periodic reports.
The amendments will also strain global companies by forcing timelier disclosure of such items. The current five business and 15 calendar day Form 8-K filing schedule will be replaced by a new deadline: four business days.
According to the SEC, the amendments are responsive to the current disclosure goals of Section 409 of the Sarbanes-Oxley Act by requiring public companies to disclose, on a "rapid and current basis," material information regarding changes in a company's financial condition or operations.
New Disclosures
The eight new disclosure items include:
MUELLER'S INSIGHTS
Ronald Mueller, a former SEC legal counsel who is currently a disclosure expert and partner at Gibson, Dunn & Crutcher, provided CW this insight on the new rules:
There are a number of issues regarding the new 8-K rules that were touched upon but not fully addressed in the SEC's open meeting when it adopted the rule amendments.
Major Customers?
For example, there was discussion about disclosure of loss of a major customer, which was one of the proposed disclosure items but was not expressly called out in the SEC's press release on the new rules as one of the required disclosure items. Also, from the text of the SEC's press release on the new rules, it appears that that non-binding merger letters of intent are not required to be disclosed.
Safe Harbor Implications
Perhaps most interesting will be the precise language and operation of the safe harbor from Rule 10b-5 that the Commission adopted.
From the discussion at the open meeting, it appears that the safe harbor applies if a company fails to make disclosure, but not if it makes a hasty, and in retrospect not complete, disclosure.
Say that something has happened and the company is assessing whether it is material. If the company rushes to get disclosure out within four business days, and even before they have a full assessment of the magnitude of the event, then the company does not have 10b-5 protection for its disclosure.
If it holds off a few days to continue to assess materiality and so that management can get their hands around the event, then the company does not have 10b-5 liability for delaying the disclosure.
As a result, companies may find a bias to hold off disclosure until they are ready to make complete disclosure.
I don't view that as a bad rule or unintended consequence. As one of the Commissioners suggested in the meeting, bad information is worse than delayed information.
I suspect that most companies will still try to get information out as soon as they can even if not within the four business days so as to mitigate the risk of an SEC enforcement action, even though the safe harbor would allow them to delay disclosure until the next 10-K or 10-Q.
Additional Commentary From Gibson, Dunn & Crutcher
Entry into a material non-ordinary course agreement;
Termination of a material non-ordinary course agreement;
Creation of a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
Triggering events that accelerate or increase a material direct financial obligation or a material obligation under an off-balance sheet arrangement;
Material costs associated with exit or disposal activities;
Material impairments;
Notice of delisting or failure to satisfy a continued listing rule or standard; transfer of listing; and
Non-reliance on previously issued financial statements or a related audit report or completed interim review (restatements).
Missing from the original proposed list of disclosures was the loss of a major customer (see Ronald Mueller's comments at right). Also missing was the
change in a rating agency decision.
Transfered Disclosures
The two disclosure items transferred, in part, from the periodic reports are:
Unregistered sales of equity securities; and
Material modifications to rights of security holders.
Expanded Disclosures
Expanded disclosure items include:
Departure of directors or principal officers, election of directors, or appointment of principal officers; and
Amendments to Articles of Incorporation or Bylaws and change in fiscal year.
Limited Safe Harbor
The amendments will also create a limited safe harbor under Exchange Act Section 10(b) and Rule 10b-5 for failure to file timely seven of the new items on Form 8-K.
The safe harbor will not apply to, or impact, any other duty to disclose a company may have and extends only until the due date of the company's periodic report for the relevant period.
Compliance Date
Compliance with these amendments will be required as of Aug. 23, 2004.
Other
The SEC also voted to publish for comment proposed amendments to Form 20-F, which
would affect foreign private issuers that change their basis of accounting to international accounting standards.
The Commission also decided to propose amendments to its forms that are designed to improve the disclosure that mutual funds and other registered management investment companies provide about their portfolio managers.
Details on both of those items can be found in the SEC announcement in the box at upper, right.
NOTE: Please note that this is a summary of a proposed SEC rule, and should not be construed to be a complete or final rule, nor should it be construed to be legal guidance. Please refer to the SEC's Web site for updated and final rule information.
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