SEC Modernizes Disclosures of Business, Legal Proceedings, and Risk Factors; Increases Focus on Human Capital
As part of its “disclosure effectiveness initiative” the Securities and Exchange Commission introduced in 2016, on August 26, 2020, the Commission amended Regulation S-K’s public company disclosure requirements related to business description, legal proceedings and risk factors. Shifting away from prescriptive disclosures to a more principles-based framework “rooted in materiality,” the amendments attempt to reflect the many changes in capital markets and the domestic and global economy in recent decades. The amendments also attempt to reduce duplicative disclosures. According to Commission Chairman Jay Clayton, these are the first significant amendments to such disclosures in over 30 years. As expected, the amendments illustrate the Commission’s increased focus on human capital disclosures.
Description of Business
The new rules amend Regulation S-K’s Item 101(a) provisions applicable to a registrant’s disclosures on the general development of its business by:
- making it largely principles-based, requiring disclosure of information material to an understanding of the general development of the business;
- replacing the previously prescribed five-year look-back timeframe with a materiality framework; and
- permitting a registrant, in filings made after a registrant's initial filing, to provide only an update of the general development of the business focused on material developments that have occurred since its most recent full discussion of the development of its business, which will be incorporated by reference.
Regulation S-K’s Item 101(c) requirements on the narrative description of business are amended by:
- clarifying and expanding the principles-based approach, with a non-exclusive list of disclosure topic examples drawn in part from topics currently contained in the rules;
- including, as a disclosure topic, a description of the registrant's human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business; and
- refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.
The new rules amend Regulation S-K’s Item 103 disclosure requirements related to a registrant’s legal proceedings by:
- expressly stating that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure; and
- implementing a modified disclosure threshold for certain governmental environmental proceedings resulting in monetary sanctions that increases the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, but that also affords a registrant some flexibility by allowing the registrant, at its election, to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant.
The new rules amend Regulation S-K’s Item 105 provisions applicable to a registrant’s risk factors disclosures by:
- requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;
- refining the principles-based approach by requiring disclosure of "material" risk factors; and
- requiring risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.
The amendments will be effective 30 days after publication in the Federal Register.
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