SEC Expands Smaller Reporting Company Definition; Approves Other Matters

At an open meeting held today, the SEC expanded the definition of a “smaller reporting company.” The SEC also voted on several other issues that are discussed further below.

Definition of Smaller Reporting Company

The new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. The rules will become effective 60 days after publication in the Federal Register.

The SEC staff indicated that this change would increase the number of companies that qualify as smaller reporting companies by nearly 1,000 registrants and will permit more registrants to use scaled disclosure requirements.

The action by the SEC does not change the definition of an “accelerated filer.” Several SEC Commissioners expressed their view that any future changes to the accelerated filer definition would be much more significant and welcome than those changes made today to the definition of a smaller reporting company. Most notably, changing the definition of an accelerated filer would relieve many registrants from the requirement to comply with the requirements of Section 404(b) of the Sarbanes-Oxley Act. Section 404(b) requires a publicly-held company’s auditor to attest to, and report on, management’s assessment of its internal controls.

Chairman Jay Clayton indicated during the meeting that he has asked the SEC staff to formulate recommendations on possible future changes to the accelerated filer definition that could reduce the number of registrants that meet this threshold. Currently the accelerated filer threshold is $75 million.

Inline XBRL Tagging of Data

The SEC voted to adopt amendments to its rules and forms to require the use of the Inline XBRL format for the submission of operating company financial statement information and fund (mutual funds and ETFs) risk/return summary information and related changes.

The amendments, which will go into effect in phases, require the use of Inline XBRL for financial statement information and risk/return summaries. Inline XBRL has the potential to benefit investors and other market participants while decreasing, over time, the cost of preparing information for submission to the Commission. The amendments also eliminate the requirements for operating companies and funds to post XBRL data on their websites.

Inline XBRL is a format that allows filers to embed XBRL data directly into a HyperText Markup Language (HTML) document. Inline XBRL allows filers to embed XBRL data directly into an HTML document, eliminating the need to tag a copy of the information in a separate XBRL exhibit. The SEC and its staff indicated that Inline XBRL format has the potential to provide a number of benefits to companies and users of the information. On a long-term basis, Inline XBRL should decrease filing preparation costs, improve the quality of structured data, and increase the use of XBRL data by investors and other market participants.

Exchange Traded Funds

The SEC voted to propose a new rule and form amendments intended to modernize the regulatory framework for ETFs, by establishing a clear and consistent framework for the vast majority of ETFs operating today.  ETFs that satisfy certain conditions would be able to operate within the scope of the Investment Company Act of 1940 and to come to market without applying for individual exemptive orders.  The proposal would therefore facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors.

The SEC indicated that ETFs are hybrid investment products not originally provided for by the U.S. securities laws. Their shares trade on an exchange like a stock or closed-end fund, but they also allow identified large institutions to redeem directly from the fund. Since 1992, the SEC has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act. ETFs have grown substantially in that period, and today the over 1,900 ETFs represent nearly 15% of total investment company assets. Investors use ETFs for a variety of purposes, including core components of long-term investment portfolios, investment of temporary cash holdings, and for hedging portfolios.

Targeted Changes to Investment Company Liquidity Disclosure

The SEC voted to adopted amendments to public liquidity-related disclosure requirements for certain open-end funds. Under the amendments, funds would discuss in their annual or semi-annual shareholder report the operation and effectiveness of their liquidity risk management programs. This requirement replaces a pending requirement that funds publicly provide a quantitative end-of-period snapshot of historic aggregate liquidity classification data for their portfolios on Form N-PORT.

The SEC indicated that it previously adopted open-end fund liquidity rule in October 2016 in an effort to promote effective liquidity risk management programs in the fund industry. Management of liquidity risk is important to funds’ ability to meet their statutory obligation regarding redeemability of their shares. Since adoption of the 2016 rule, the SEC staff has engaged in extensive outreach to identify potential issues associated with the effective implementation of the rule and has led to a series of actions taken by the SEC, including today’s adoption of targeted changes.

Amendments to the SEC’s Whistleblower Program Rules

The SEC voted to propose amendments to the rules governing its whistleblower program. The whistleblower program was established in 2010 to incentivize individuals to report high-quality tips to the SEC and help the agency detect wrongdoing and better protect investors and the marketplace.

After nearly seven years of experience administering the whistleblower program, the SEC has identified various ways in which the program might benefit from additional rulemaking. The proposed rules would, among other things, provide the SEC with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.


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