The US Securities and Exchange Commission (SEC) has adopted amendments to modernize its Regulation S-K and thereby change the rules related to environmental disclosure requirements and increase the reporting threshold for disclosure of actual or potential environmental penalties.[1] In doing so, the SEC is updating rules that have not been revised significantly in 30 years. Proposed last year as part of the SEC’s Disclosure Effectiveness Initiative, [2] the amended rules, which were adopted on August 26, 2020, are intended to improve disclosure for investors and simplify compliance for registrants. As described in the rule preamble, the amendments are “intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.” [3]
Generally, companies subject to SEC requirements must disclose any material pending legal proceedings other than “ordinary routine litigation incidental to the business.” [4] An administrative or judicial proceeding involving an environmental penalty of $100,000 or more has long been described as not being “ordinary routine litigation incidental to the business.” [5] Under the amendments, the SEC has increased the disclosure threshold from $100,000 to $300,000. In addition, the SEC now will allow companies to use an alternative threshold for reporting under certain circumstances. Specifically, under this new and more flexible approach, an alternative threshold may be used if the company determines that a different threshold is reasonably designed to result in disclosure of material environmental proceedings. If an alternative threshold is used, it may not exceed the lesser of $1 million or one percent of the current assets of the registrant and its subsidiaries. In addition, if a company uses an alternative threshold, the company-specific threshold must be disclosed in annual and quarterly reports. [6]
The amendments also make changes with respect to the disclosure of material capital expenditures for environmental control facilities. Under the rules in effect prior to the amendments, companies were required to disclose the material effect that compliance with environmental laws may have. [7] Under the newly-adopted amendments, this regulatory compliance disclosure requirement has been expanded to include government regulations, not just environmental laws. In adopting this provision, the SEC noted that the disclosure would provide important information to investors and recognized that it was currently common practice to provide such disclosures notwithstanding the lack of a line item requiring such disclosures. [8]
The amendments, which reflect a principles-based, registrant-specific approach to disclosure, will become effective 30 days after publication in the Federal Register. Companies subject to these environmental disclosure requirements should be mindful of the impact of these amended requirements on future SEC reports.
Click here to download a PDF summary of the recent amendments modernizing Regulation S-K Items 101 (Description of the Registrant’s Business), 103 (Legal Proceedings), and 105 (Risk Factors).
[1] See SEC Final Rule, Modernization of Regulations S-K Items 101, 103 and 105 (August 26, 2020) available at https://www.sec.gov/rules/final/2020/33-10825.pdf.
[2] See SEC Spotlight on Disclosure Effectiveness, available at https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
[3] See Summary section, Preamble, SEC Final Rule.
[4] See 17 CFR § 229.103(a)(which requires disclosure of “any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is subject.”)
[5] See Instruction 5 to Item 103.
[6] See SEC Final Rule, 17 CFR § 229.103(c)(3)(iii).
[7] See 17 CFR § 229.101(c)(1)(xii)(which required the disclosure of the material effects of compliance with environmental laws on the capital expenditures, earnings, and competitive position of the registrant and its subsidiaries).
[8] See Preamble, SEC Final Rule, at p.41 and SEC Final Rule, 17 CFR § 229.101(c)(2)(i).