On August 26, 2020, the SEC continued to keep its foot on the gas with respect to its recent practice of modernizing disclosure rules by adopting amendments to the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. As discussed in a previous post by my colleague, Bob Lamm, regarding the rule changes as originally proposed on August 8, 2019, the changes significantly update the provisions of Regulation S-K and signal a continuing shift to a principles-based approach to disclosure. The SEC gave the green light to the amendments substantially as proposed in 2019, with some minor modifications. Details of the final amendments are included below. The previous post provides commentary on some of the rule changes and some observations regarding the potential impacts of the shift to a principles-based approach to disclosure on registrants and their advisors.
In its press release announcing the amendments, the SEC acknowledged that these updates were due – actually, overdue – after decades of evolution in the capital markets and the domestic and global economy without any corresponding revisions in the disclosure rules. SEC Chairman Jay Clayton stated that the improvements to these rules “are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions,” adding that the revisions “add[] efficiency and flexibility to our disclosure framework.”
The final amendments will, among other things:
- amend Item 101(a) 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 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;
- amend Item 101(c) by:
- clarifying and expanding the principles-based approach with a non-exclusive list of disclosure topics drawn in part from topics currently contained in Item 101(c);
- 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, rather than just environmental laws;
- amend Item 103 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
- increasing from $100,000 to $300,000 the threshold of sanctions that will trigger disclosure of certain governmental environmental proceedings, while affording flexibility by allowing a company, at its election, to select a different threshold 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; and
- amend Item 105 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 of Item 105 by requiring disclosure of “material” risk factors; and
- requiring risk factors to be organized under relevant headings in addition to the sub-captions 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.
Notably, the rules have been criticized for not addressing climate change and other environmental matters. In addition, some have criticized the amendments relating to human capital resources as being too vague – another potential hazard of a principles-based approach.
The amendments will be effective 30 days after publication in the Federal Register – and will therefore affect the 2021 disclosure season.