New SEC Rule Permits Summary Section in Annual Reports
The SEC issued a new interim rule permitting, but not requiring, issuers to include a summary section in their annual reports. This new rule, which was effective June 9, 2016, is in reaction to the FAST Act, enacted in December 2015, which included direction to the SEC to modernize and simplify disclosure requirements and eliminate outdated or unnecessary provisions in Regulation S-K.
The amendment is principle based, so it allows issuers flexibility in deciding which items to summarize, as long as the information is presented fairly and accurately. Additionally, the rule does not set a length for the summary, instead stating that it should be brief. While the rule does not specify what information should be included in a summary, issuers can look to the summary typically included in a Form S-1. The SEC has indicated that the issuer may decide which items to summarize and that the summary should provide more information than a table of contents. By permitting issuers to determine the content, length, and location of a summary, the SEC believes it will enable issuers to tailor the format and presentation of the summary to best suit the specific aspects of their business, and operational and financial results. It also will enable issuers to focus on topics or items they consider important to communicate to investors. The summary should not merely repeat portions of the text of the Form 10-K, but should provide a brief overview of those items that are deemed the most significant. Items in the summary must be hyperlinked to the related, more detailed disclosures in the Form 10-K and to any exhibits included in the filing.
The SEC is seeking comments on this rule. They have specifically asked that the following questions be considered:
- Are companies and investors likely to find a Form 10-K summary useful? If so, should we propose mandating a summary?
- Would it be helpful to EDGAR users for the Form 10-K summary or a link to the summary to be displayed on a registrant’s EDGAR search results landing page?
- Should we impose a length limitation on the summary? If so, what limitation would be appropriate (e.g., a page limit, word limit, character limit)?
- Should we provide further guidance on preparation of the summary? For example, should we include language similar to Item 503(a) of Regulation S-K, which covers a prospectus summary?
- Should we require that the summary appear at the beginning of the Form 10-K? Should we require certain content or a specific format for the Form 10-K summary? For example, should we propose to require registrants choosing to prepare a summary to include specified Form 10-K items, such as the MD&A? Are there some items that registrants should not be permitted to include in a summary? If so, which items should be required to be included in, or excluded from, the summary?
- Should we require registrants that cannot include a summary of the Part III information (because that information will be incorporated by reference from a later filed proxy or information statement involving the election of directors) to file a Form 10-K amendment to update the summary to reflect the Part III information when that information is filed with the proxy or information statement?
- Are there other cross-reference methods that we should allow in lieu of, or in addition to, hyperlinks?
- Should we propose to amend other annual reporting forms, such as Form 20-F filed by foreign private issuers, or Form 1-K filed by issuers that have conducted a Regulation A offering, to expressly allow a summary similar to the approach we are adopting for Form 10-K? Would such revisions be useful given that our rules do not prohibit such registrants from voluntarily including a summary in their annual reports?