- New SEC Regulations Affect Timing of Annual Report Preparation and Filing
- January 4, 2006
- Law Firm: Squire, Sanders & Dempsey L.L.P. - Cleveland Office
Recent rule changes by the Securities and Exchange Commission have resulted in changes to securities offering procedures, rules relating to communications by issuers, and the content and timing of periodic reports filed with the SEC. This Update discusses only those changes that may affect the timing of the preparation and filing of annual reports.
The Securities Offering Reform, which became effective December 1, 2005, requires most public companies to include a discussion of the most significant risks applicable to the company in its next annual report on Form 10-K (U.S. issuers) or Form 20-F (foreign private issuers). In addition, companies will be required to discuss any significant changes to these risks through updates in their quarterly reports on Form 10-Q.
This requirement does not apply to small business or asset-backed issuers and does not substantively change the risk factor disclosures of foreign private issuers. Although the SEC has acknowledged there may be circumstances in which a discussion of the most significant business and industry risks affecting a company is not necessary, we expect that most public companies will include a discussion of applicable risks.
In light of this new requirement, public companies should consider the following realities:
- Additional time will be required in the annual meeting cycle. The identification and preparation of disclosure of the relevant risks can be a time-consuming process, involving members of a company's disclosure committee and other appropriate persons inside and outside the company. As this is a new requirement, the process likely is not included in the historical timeline for preparing the Form 10-K and provision should be made for the new activity in this year's timeline. This requirement is comparable to the risk factor requirement applicable to registration statements for securities offerings, and companies that have engaged in recent securities offerings should be able to use that risk factor discussion as a starting point for their Form 10-K. In any event, companies are well advised to begin identifying significant business and industry risks affecting them and crafting the appropriate disclosure as soon as possible.
- Risks must be presented in "plain English." An important element of this new requirement is that companies must present this risk discussion in accordance with "plain English" principles that are designed to make the disclosure easier to understand. These principles were set forth by the SEC in 1998 in A Plain English Handbook and are generally required to be used for risk factor disclosure in registration statements for securities offerings. This style of presentation differs considerably from that used by many companies in their Form 10-K and, for companies that have not created risk factor disclosure for a securities offering, it is a task that will involve meaningful time and effort. In addition, the requirement that the risk disclosure be presented in a "plain English" style may cause companies to consider the extent to which they wish to modify other sections of their Form 10-K to achieve consistency throughout the document.
Amendments to Filing Deadlines for Periodic Reports
On December 21, 2005, the SEC adopted amendments to the Exchange Act that modified periodic report filing deadlines. To implement these changes, the SEC created a new category of "large accelerated filers," which includes companies whose public float exceeds US$700 million, and amended the definition of "accelerated filer" to refer to companies whose public float is between US$75 and US$700 million.
As a result of these amendments, the filing deadlines for periodic reports are as follows:
- Large accelerated filers will have 75 days following their current fiscal year to file their Form 10-K, but will be subject to a 60-day deadline for fiscal years ending on or after December 15, 2006;
- Accelerated filers will have 75 days following each fiscal year to file their Form 10-K, this year and beyond; and
- Large accelerated filers and accelerated filers will have 40 days following each fiscal quarter to file their quarterly reports.
These changes do not affect non-accelerated filers or foreign private issuers.