SEC's 8-K Reporting Rules Face Major Changes

Companies will soon have to file substantially more information than ever before with the Securities and Exchange Commission on changes to business operations, and will have to do so in a much tighter time frame.

Most notably, the new Form 8-K requires reporting of "material events" as compared to "major events" under the old regulations, and also contains eight new events that trigger disclosure. (Click here for summary of important changes to Rule 8-K.) The new rules go into effect Aug. 23.

Another significant change is that the new reporting time frame is four business days after the occurrence of an event triggering the disclosure requirements, which is substantially shorter than the previous three-week deadline.

These are among some of the most significant changes made to the corporate disclosure requirements under Rule 8-K since SEC first introduced the rule in 1934. (The new rule can be found in the important documents section of this website.)

Experts indicated that the only way in-house counsel can meet the new four-day deadline is to inform all employees – from upper management to support staff – what the new regulations require, and explain the company’s procedures for filing the 8-K report, particularly to whom they should report a triggering event.

Counsel will have no choice but to rely on employees involved in company transactions to quickly report triggering events to the legal department. If the legal department knows about the events as they are happening, attorneys can get a jump on drafting the filing before the four-day clock begins to tick, experts said.

"Whoever is doing it, the CFO or in-house counsel, they need to be in the loop before the transactions so they can timely report," said Jay Hennig of Nexsen Pruet in Columbia, S.C. "You would think that would occur, but it doesn’t. Sometimes a transaction may have closed before [those required to report it to the SEC] get wind of it."

Several outside attorneys said that while the new regulations will require more work, they would not cause a fundamental shift in how companies do business.

"After Sarbanes-Oxley, a lot more management time gets spent on compliance and reporting and things like that, and this is another step in that general direction," said John Newell of Boston’s Goodwin Procter.

Added Hennig: "This formalizes the items that need to be disclosed. This is not an unusual list. It just changes the deadlines and things have to be reported quicker. People have to be ready to report and not let things drag on. Under the old rules [companies] had as much as 15 days, and some things didn’t have deadlines."

Strategies For Compliance

In-house counsel should evaluate the company’s business and determine what sorts of deals and changes will trigger the reporting requirement, experts advised. Companies could review existing agreements and arrangements and identify those for which amendments or terminations may trigger an 8-K filing, and then establish a tracking system for such amendments or terminations.

"It’s a matter of making sure you’ve created an internal checklist so you know what kinds of things unique to that business are going to trigger the obligation," said Jim Wheaton of Troutman Sanders in Norfolk, Va.

"In the material contract area, you’ve got to give other people in your organization an assessment of what kinds of contracts are ordinary course and don’t require reporting, and those which raise flags," Wheaton said. "Several dozen material contracts are listed in a 10-K, and amending any [of them] triggers an 8-K filing. You’ve got to remind them that if they’ve got one of these contracts existing, they’ve got to tell whoever is responsible for reporting."

Andrew J. Merken of Burns & Levinson in Boston suggested that those most likely to be involved in triggering events be sent periodic – perhaps even daily – reminders of the triggering events and the need to report them immediately.

Merken also recommended that either general counsel or the company’s CFO manage the SEC reporting process.

"That one person needs to be identified and everyone in the company needs to know who that person is for two reasons," Merken explained. "First, that’s the person that needs to be making sure the procedures are in place so the events that are triggering 8-K filings are brought to that person’s attention in enough time – often before they happen – so 8-Ks can be drafted and reviewed and filed. Second, if on a lark anyone says, ‘Gee, shouldn’t someone know about this?’ they know to call the general counsel or CFO."

For companies that have disclosure committees, having that committee in charge of 8-K filings is another option.

"A lot of companies have put together disclosure committees to oversee disclosure controls and practices," noted Tom Proost of Thompson Coburn in St. Louis. "Companies may want to consider taking that committee and putting it in charge of overseeing 8-Ks as well. [Get] someone from the finance department and the general counsel on the committee to make sure they are flagging ahead of time possible reportable events so you’re ready to report them."

It’s also a good idea to evaluate who sits on these committees, Newell of Boston said.

"For example, some companies are still kind of lean on inclusion of business and operations people," he said. "Depending on how the company is structured and staffed, they may be the first to get warning of events. If they’re not in, they need to get put in."

However, some individuals don’t want to get bogged down in the particulars of reporting requirements. They’d rather be out selling or doing their specific jobs.

"I need to educate them on all this SEC stuff," Newell said. "I need to brief them on issues of materiality so if things happen, they send the information up the chain and do it quickly."

The onus is clearly on in-house counsel to complete many of these preparatory tasks.

"It’s in-house counsel," Newell said, "who should be making sure senior management knows that the legal staff is a really important contributor and needs to be hard-wired in now. This is not something that goes up to the top and bounces back down to the chief legal officer. There just is not time."

Err On The Side Of Filing

Many of the events that have to be reported under the new rules are not exactly the business particulars executives want to be disclosing, Newell pointed out.

"Things like management determinations that result in the company taking charges for certain items. Some events involve either the creation or termination of an agreement where the two parties to the agreement may not agree whether its been terminated, for example," he said.

But in the end, "there really isn’t a way around that," Newell said.

That means if it’s material to the company’s business, it’s best to err on the side of filing a report.

"There will be a lot more gray areas that we recommend you go ahead and file it unless you have a true business reason that you don’t want it out there," Proost added.

Materiality has always been a difficult standard, Merken observed.

"Plenty of people argue over whether an event is material or not because the standard is somewhat gray," Merken said. "But it now needs to be applied to more events and things going on with the company’s financial situation, and much more quickly, than before.

"I’ve had this discussion many times with clients," Merken continued. "Picture yourself on the receiving end of this question from a shareholder at a shareholders meeting: ‘Why wasn’t this event reported? It certainly seems important.’ And you answer, ‘Because our lawyer told us we didn’t have to.’ Do you really want to give that answer?"

Perhaps four or five years ago that answer would have placated a shareholder, but not anymore.

"In this investing environment, that’s no longer any good," Merken said. "Put yourself in that position and think, unless there’s a good business reason not to report it, if somebody asks this question, what do you want to be telling them?"

He added: "An apt analogy is an earthquake plan if you’re living on a fault in California. It’s not a remote event that might happen. You know these things are going to be happening. You can’t wait until after it happens. You’ve got be to planning and putting procedures in place."

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