On August 8th, the SEC proposed amendments that would modernize some of the descriptions and disclosures that registrants are required to make pursuant to Regulation S-K. These changes should improve disclosures for investors and simplify compliance efforts for registrants.
Monday, August 19. 2019
SEC Proposes to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K
Specifically, these changes will apply to the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that are part of Regulation S-K. These amendments should improve readability of disclosure documents as well as limit repetitive and immaterial reporting. The proposed changes are part of a comprehensive evaluation of the SEC’s disclosure requirements that was recommended in the staff’s Report on Review of Disclosure Requirements in Regulation S-K (the “S-K Study”), which was mandated as part of Section 108 of the Jumpstart Our Business Startups (JOBS Act). In developing the amendments, the SEC considered comments received in response to its evaluation of how and where information is disclosed and how that disclosure could benefit from technology. It also took into account its staff’s experience with Regulation S-K and how the regulatory and business landscape has changed since Regulation S-K was adopted.
Generally, the rules to be modified would now emphasize a more principles-based approach as businesses differ in terms of which aspects of these disclosures are material to them. A flexible approach such as this may elicit more relevant disclosures about these items. It should be noted that the proposed amendment to Item 103 (legal proceedings) will continue with the prescriptive approach since that requirement depends less on the specific characteristics of the registrants.
The changes would include:
- making it largely principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant’s business.
- including as a listed disclosure topic the transactions and events that affect the company’s operations to the extent material to an understanding of the registrant’s business. This includes any material changes to a registrant’s previously disclosed business strategy.
- eliminating a prescribed timeframe of disclosure.
- permitting a registrant to provide only an update of the general development of the business that focuses on material developments in the reporting period. This should include a hyperlink to the registrant’s most recent filing that, together with the update, would contain the full discussion of the general development of the registrant’s business.
- clarifying and expanding this Item’s principles-based approach by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c).
- including human capital resources as a disclosure topic, including any human capital measures or objectives that on which management focuses in managing the business. This pertains to information to the extent that it is material to an understanding of the registrant’s business, such as measures or objectives that address the attraction, development, and retention of personnel.
- refocusing the regulatory compliance requirement by including government regulations, not just environmental provisions, as a topic.
- expressly stating that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document (to avoid duplicative disclosure).
- revising the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.
- requiring a summary risk factor disclosure if the risk factor section exceeds 15 pages.
- refining the principles-based approach of this rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed.
- requiring risk factors to be organized under relevant headings with any risk factors that may generally apply to an investment in a security disclosed at the end of the risk factor section under a separate heading.
These proposed changes will be open for public comment for 60 days after publication in the Federal Register. The proposed rule changes can be read here. You can submit comments using the form available on the SEC’s website or by e-mailing firstname.lastname@example.org with the reference number (S7-11-19) in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, please remember to include reference number S7-11-19.