SEC Updates Item 405 Disclosure and Due Diligence Requirements

As part of its “FAST Act Modernization and Simplification of Regulation S-K” project, the SEC has adopted amendments to the Section 16(a) compliance rules. In his blog about the amendments, Alan Dye notes that they are designed to eliminate requirements and disclosures that are unnecessary to Section 16(a) compliance.

Below is a summary of the amendments.

New 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 disclosures 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 disclosures that no delinquencies occurred. It will be interesting to see if this achieves the result the SEC intends or if companies keep making the disclosures anyway.

Form 10-K Checkbox Eliminated

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.

Requirement to Furnish a Copy of Forms to the Company Eliminated

Rule 16a-3(e) has been amended to eliminate the requirement that insiders furnish a copy of their Forms 3, 4, and 5 to the company no later than the time of filing. Because these filings are available via EDGAR, it is no longer necessary for insiders to provide copies to the company.

Company’s Item 405 Due Diligence Obligation Modified

Before the amendments, companies were required to review the reports furnished by insiders as part of their Item 405 due diligence. Although insiders will no longer furnish copies of their reports to the company, companies are still required to complete Item 405 due diligence. Under the new rule, companies may review insiders’ EDGAR filings for this purpose, as well as rely on any other information they may have relating to insiders' transactions and filings during the year.

The amendments are effective May 2, 2019.