SEC Adopts Amendments to Modernize Reg S-K Disclosure Requirements
On August 26, the SEC modernized the disclosure requirements in Items 101 (Description of Business), 103 (Legal Proceedings), and 105 (Risk Factors) of Regulation S-K, reflecting the first significant revisions to these disclosure items in over 30 years.
The new principles-based rules will:
- provide additional flexibility for an issuer to craft its business description to its particular circumstances;
- reduce, and in certain instances, eliminate disclosures that are not material to an investor’s understanding of such issuer’s business or legal proceedings; and
- provide for more organized and tailored risk-factor disclosure, including a summary section if risk factor disclosures exceed 15 pages.
The amended rules add a requirement for disclosure of human capital resources, including any human capital measures or objectives an issuer focuses on in managing its business, to the extent material.
Items 101, 103 and 105 of Regulation S-K are used in many Securities and Exchange Act filings, including registration statements such as Form S-1 and annual and quarterly reports on Forms 10-K and 10-Q. The new rules will be effective 30 days after publication in the Federal Register.
The SEC adopted these amendments in part to improve the readability of disclosure documents by discouraging repetition and disclosure of immaterial information, and to simplify compliance efforts for issuers. The SEC believes the new rules will permit an issuer to provide better disclosures more tailored to its business, benefiting its investors and reducing compliance burdens.
The final amendments, among other things, amend the following items in Regulation S-K:
Regulation S-K Item | Summary of Current Requirements | Summary of
Amendments |
Items 101(a))
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Requires a description of the general development of the business of the issuer during the past five years, or such shorter period as the issuer may have been engaged in business. |
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Item 101(c)
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Requires a narrative description of the business done and intended to be done by the issuer and its subsidiaries, focusing upon the issuer’s dominant segment or each reportable segment about which financial information is presented in its financial statements. To the extent material to an understanding of the issuer’s business taken as a whole, the description of each such segment must include disclosure of several specific matters. |
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Item 101(h)
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Item 103
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Requires disclosure of any material pending legal proceedings including the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Similar information is to be included for any such proceedings known to be contemplated by governmental authorities. Contains a threshold for disclosure based on a specified dollar amount ($100,000) for proceedings related to Federal, State, or local environmental protection laws. |
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Item 105
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Requires disclosure of the most significant factors that make an investment in the issuer or offering speculative or risky and specifies that the discussion should be concise, organized logically, and furnished in plain English. The Item also states that issuers should set forth each risk factor under a subcaption that adequately describes the risk. Additionally, Item 105 directs issuers to explain how each risk affects the issuer or the securities being offered and discourages disclosure of risks that could apply to any issuer. |
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Smaller Reporting Companies
Item 101(h) sets forth alternative disclosure standards for smaller reporting companies that allow an issuer to, among other things, provide a less detailed description of its business than is required under Item 101(a). The amendment to Item 101(h) eliminates the provision that requires smaller reporting companies to describe the development of their businesses during the last three years, and directs smaller reporting companies, in describing the development of their businesses, to provide information for the period of time that is material.
Consistent with new Item 101(a), the amendment to Item 101(h) also permits a smaller reporting company, after its initial registration statement, to provide only an update of the general development of the full discussion with an incorporation by reference to the most recent full discussion. In so doing, a smaller reporting company is permitted to incorporate the full discussion from only a single previously filed registration statement or report by including an appropriate hyperlink.
Unlike the substantial revisions to disclosure set forth in revised Items 101(a) and (c), the new rules do not otherwise change the prescriptive disclosure requirements currently set forth in Item 101(h).
Human Capital Disclosure
Item 101(c) of Regulation S-K now requires, to the extent such disclosure is material, a description of an issuer’s human capital resources, including any human capital measures or objectives that the issuer focuses on in managing its business. Further, the Item also requires an issuer to disclose, to the extent material, the number of persons employed by the issuer. The SEC noted that to the extent that a measure, for example, of an issuer’s part-time employees, full-time employees, independent contractors and contingent workers, and employee turnover, in all or a portion of the issuer’s business, is material, the issuer must disclose this information.
Because the SEC determined to adopt a principles-based approach, the new rule does not define “human capital.” The SEC believes “this term may evolve over time and may be defined by different companies in ways that are industry specific.” The final rule identifies various human capital measures and objectives that address the attraction, development, and retention of personnel as non-exclusive examples of subjects that may be material, depending on the nature of the issuer’s business and workforce. The SEC indicated that each issuer’s disclosure must be tailored to its unique business, workforce, and facts and circumstances.
Further, while the new rule does not require an issuer to use a disclosure standard or framework to provide human capital disclosure, the SEC believes a principles-based approach affords an issuer the flexibility to provide disclosure in accordance with some or all of the components of any current or future standard or framework that facilitates human capital resource disclosure. In his public statement made in conjunction with the adoption of the amendments, SEC Chairman Clayton stated that he does “expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs” and that “[a]s is the case with non-GAAP financial measures, [he] would also expect companies to maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics used or the definitions of those metrics.”
The new rule passed by on a 3-2 vote. The two dissenting commissioners disapproved of adopting “a generic and vague” principles-based disclosure requirement with respect to human capital and would have required specific disclosures. The dissenters also criticized the new rule for being “silent on two critical subjects: diversity and climate risk disclosures.” One dissenting commissioner argued for additional study of environmental, social and governance (ESG) disclosures and metrics. We expect ESG matters to remain a key focus of the SEC, particularly if the White House changes hands in the election.