On August 8, 2019, the Securities and Exchange Commission (“SEC”) proposed for public comment a set ofamendmentsto modernize the business (Item 101), legal proceedings (Item 102), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. These amendments are the most recent step in the SEC’s disclosure modernization efforts. The proposed amendments continue the SEC’s movement in favor of “principles-based” disclosure guidelines over prescriptive requirements. The proposal also permits an increased use of hyperlinks, cross-references and summaries. If adopted, the amendments are intended to discourage repetition and disclosure of non-material information in order to focus on more company-tailored disclosures. There is a 60-day public comment period on the proposed amendments following their publication in the Federal Register.
The proposed amendments to Regulation S-K include, among others:
Revising Item 101(a) (General Development of Business) to (i) shift to “principles-based” disclosure by providing a company with a non-exclusive list of the types of information that such company may need to disclose, which list would now cover changes to business strategy as a potential disclosure topic, and require disclosure of a topic only to the extent that such information ismaterialto an understanding of the general development of a company’s business, (ii) eliminate the prescribed timeframe for the disclosure and (iii) for future filings, only require an update for material developments, paired with a hyperlink to the full discussion of the business;
Revising Item 101(c) (Narrative Description of Business) to shift to “principles-based” disclosure, including the addition of the new topic of human capital resources. The proposed rule would replace the current requirement to disclose the number of employees with a requirement to describe the company’s human capital resources, to the extent material to an understanding of the company’s business. Such disclosure would include any human capital measures or objectives that management focuses on in managing the business. The proposed rule provides non-exclusive examples of human capital measures and objectives that may be material, depending on the nature of the company’s business and workforce, such as measures or objectives that address the attraction, development, and retention of personnel. The SEC stated its intent is to elicit, to the extent material, “disclosures regarding human capital that allow investors to better understand and evaluate this company resource and to see through the eyes of management how this resource is managed”;
Revising Item 103 (Legal Proceedings) to permit disclosure of material legal proceedings by including hyperlinks or cross references to legal proceedings disclosure located elsewhere in the filing to avoid duplicative disclosure and revising the $100,000 threshold for disclosure of government environmental proceedings to $300,000 to adjust for inflation; and
Revising Item 105 (Risk Factors) to (i) replace the requirement to disclose the “most significant” risks with “material” risks, meaning those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security, (ii) require a risk factor summary if the actual risk factor section exceeds 15 pages through the use of a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the company speculative or risky, (iii) require that the risk factors be organized under relevant headings and (iv) require, if a company determines to disclose risk factors that could apply to other companies and the disclosure does not provide an explanation of why the identified risk is specifically relevant to an investor in such company’s stock, disclosure of such risk factors at the end of the risk factor section under the caption “General Risk Factors.”