SEC Proposes to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors
The SEC has issued proposed rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. The SEC stated the proposed amendments are intended to update the rules to improve disclosures for investors and to simplify compliance efforts for registrants. The proposed rules will be subject to a 60-day comment period once published in the Federal Register.
The proposed amendments would revise Item 101(a), which requires a description of the general development of the registrant’s business, to:
- 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 amendments would revise Item 101(c), which requires a narrative description of the registrant’s business, to:
- 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 amendments would revise Item 103, which requires a description of the registrant’s pending legal proceedings, to:
- 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 threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000 to adjust for inflation.
Finally, the proposed amendments would revise Item 105, which requires a description of the registrant’s risk factors, to:
- 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.