SEC Streamlines Item 405 Disclosure and Due Diligence Requirements

Last week, as part of its “FAST Act Modernization and Simplification of Regulation S-K” project, the SEC adopted amendments to the Section 16(a) compliance rules. The amendments are designed to eliminate requirements and disclosures that are unnecessary to Section 16(a) compliance.

The amendments will require most companies to tweak their compliance procedures, and I will add those tweaks to the year-end compliance checklist. In short, the amendments:

• Eliminate the requirement to furnish a copy of Forms 3, 4 and 5 to the company. Rule 16a-3(e) has been amended to eliminate the requirement that insiders furnish a copy of their reports to the company no later than the time of filing.
• Modify the company’s Item 405 due diligence obligation. Before the amendments, companies were required to review the reports furnished by insiders as part of their Item 405 due diligence. Because insiders will no longer furnish copies of their reports to the company, companies will now be allowed to review insiders’ EDGAR filings instead.
• Revise the caption for Item 405 disclosure. Before the amendments, Item 405 required companies to make required delinquency disclosures under the caption “Section 16(a) Beneficial Ownership Compliance.” Now, the disclosure must appear under the caption “Delinquent Section 16(a) Reports.” This change is intended to reduce unnecessary disclosures by making it less likely that companies will include voluntary disclosure that no delinquencies occurred, since they now will have to provide that disclosure under a caption that refers to delinquencies rather than compliance. A new instruction to Item 405 will encourage companies not to make voluntary disclosure that no delinquencies occurred.
• Eliminate the 10-K checkbox. The checkbox on the cover page of Form 10-K, relating to whether the company is disclosing or expects to disclose reporting delinquencies, has been eliminated. The purpose of the checkbox was to allow the SEC to monitor insiders’ compliance with the reporting requirements, but the SEC now has better tools for identifying delinquencies.

The amendments become effective 30 days after publication in the Federal Register.