Disclosure Update and Simplification and the Annual Report to Shareholders

One of the topics that frequently surprises folks in our workshops is that the annual report to shareholders (ARS) is a formal requirement in the Proxy RulesRule 14a-3(b)  states, that when a company is soliciting proxies for a meeting (or process in lieu of a meeting), which will include the election of directors:

(b)  ****  each proxy statement furnished pursuant to paragraph (a) of this section shall be accompanied or preceded by an annual report to security holders  ***

The rule then goes on to enumerate what must be included in the ARS, including S-X financial statements, selected financial data, MD&A and more.  Almost all the requirements for the ARS encompass information that is also required in Form 10-K.  This is why many companies use the economical strategy of meeting this requirement with a “10-K wrap”.

(Check out our next post for another important aspect of the ARS, namely, that the ARS is “furnished” rather than “filed”.)

Rule 14a-3 was not changed by the SEC’s Disclosure Update and Simplification Rule.  That said, the rule does include these requirements:


(7) The report shall contain information relating to the registrant’s industry segments, classes of similar products or services, foreign and domestic operations and exports sales required by paragraphs (b), (c)(1)(i) and (d) of Item 101 of Regulation S-K (§229.101 of this chapter).


(9) The report shall contain the market price of and dividends on the registrant’s common equity and related security holder matters required by Items 201(a), (b) and (c) of Regulation S-K (§229.201(a), (b) and (c) of this chapter). If the report precedes or accompanies a proxy statement or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting), furnish the performance graph required by Item 201(e) (§229.201(e) of this chapter).

Both S-K Item 101 and 201 were changed by the Disclosure Update and Simplification rule.  Among the changes were the elimination of the segment and foreign operations disclosures in Item 101 and the market price information in Item 201.

What does this mean for the ARS requirements?  Do companies still need to provide this information in the ARS even though it is no longer required in the Form 10-K? 

A first reading of the two paragraphs above might leave that question a bit up in the air, but a very literal reading would be that since S-K Items 101 and 201 no longer require information about segments and stock prices, the information is no longer required in the ARS.

But, perhaps more appropriately, the rational for these changes in the Final Rule(check out page 101 of the final rule for an example) clearly also apply to the ARS.  So, a common sense reading also would say that even though Rule 14a-3 still refers to this information, the elimination of this information in Form 10-K means it is also eliminated in the ARS.

Lastly, as a bit of ARS trivia, and a reminder to never read these rules too literally (and also to make sure you look for related guidance), the same proxy rule has this requirement in paragraph c:

(c) Seven copies of the report sent to security holders pursuant to this rule shall be mailed to the Commission, solely for its information, not later than the date on which such report is first sent or given to security holders or the date on which preliminary copies, or definitive copies, if preliminary filing was not required, of solicitation material are filed with the Commission pursuant to Rule 14a-6, whichever date is later. The report is not deemed to be “soliciting material” or to be “filed” with the Commission or subject to this regulation otherwise than as provided in this Rule, or to the liabilities of section 18 of the Act, except to the extent that the registrant specifically requests that it be treated as a part of the proxy soliciting material or incorporates it in the proxy statement or other filed report by reference.

If you stopped reading here, you might think this is still a requirement.  As we blogged about a while back, an important source of information is the Compliance and Disclosure Interpretations, in which this Corp Fin statement provides relief from the requirement to submit seven copies:

Proxy Rules and Schedule 14A (Regarding Submission of Annual Reports to SEC under Rules 14a-3(c) and 14c-3(b))

Last Update: November 2, 2016

Question: Exchange Act Rule 14a-3(c) and Rule 14c-3(b) require registrants to mail seven copies of the annual report sent to security holders to the Commission “solely for its information.” A similar provision in Form 10-K requires certain Section 15(d) registrants to furnish to the Commission “for its information” four copies of any annual report to security holders. Can a registrant satisfy these requirements by means other than physical delivery or electronic delivery pursuant to Rule 101(b)(1) of Regulation S-T?

 Answer: Yes. The Division will not object if a company posts an electronic version of its annual report to its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K respectively, in lieu of mailing paper copies or submitting it on EDGAR. If the report remains accessible for at least one year after posting, the staff will consider it available for its information. [November 2, 2016]

As always, your thoughts and comments are welcome!


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