As reported in a press release issued by the Securities and Exchange Comission (the SEC) on Aug. 8, 2019, the SEC voted to propose amendments to modernize Regulation S-K disclosures, in particular, Item 101(a) (the description of the general development of the registrant’s business, 101(c) (narrative description of the business), Item 103 (legal proceedings) and Item 105 (risk factors). The SEC stated that it is proposing these amendments to improve disclosures for investors and to simplify compliance for registrants by enhancing the readability of disclosure documents, as well as discouraging repetition and disclosure of information that is not material.
These proposals 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 (S-K Study). The report was mandated by Section 108 of the Jumpstart Our Business Startups Act (JOBS Act). Based on the S-K Study’s recommendation, the SEC’s staff initiated an evaluation of the information its rules require registrants to disclose, how this information is presented, where this information is disclosed, and how the SEC can better leverage technology as part of these efforts (collectively, the Disclosure Effectiveness Initiative). The overall objective of the Disclosure Effectiveness Initiative is to improve the SEC’s disclosure regime for both investors and registrants.
Summary of Proposed Amendments
In particular, the proposed amendment of Item 101(a) would:
- make 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;
- include as a listed disclosure topic, to the extent material to an understanding of the registrant’s business, transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy;
- eliminate a prescribed timeframe for this disclosure; and
- permit a registrant, in filings made after a registrant’s initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period, and with an active 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.
The proposed amendment of Item 101(c) would:
- clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
- include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business, such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and
- refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.
The proposed amendment of Item 103 would:
- expressly state 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 in an effort to encourage registrants to avoid duplicative disclosure; and
- revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.
The proposed amendment of Item 105 would:
- require summary risk factor disclosure if the risk factor section exceeds 15 pages;
- refine the principles-based approach of that rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed; and
- require risk factors to be organized under relevant headings, 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 proposal will be subject to a 60-day public comment period following its publication in the Federal Register.
The full text of the release relating to the proposed amendments can be found here.