In a joint statement in response to the SEC’s proposed changes to Regulation S-K, Commissioners Robert Jackson and Allison Herren Lee expressed some concerns about the move toward principles-based requirements and advocated for more requirements to disclose climate risk.

The SEC this month voted to propose rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make under Regulation S-K. The proposed amendments would revise Items 101(a) (description of the general development of the business); 101(c) (narrative description of the business); and 105 (risk factors) “to emphasize a more principles-based approach, because businesses differ in terms of which aspects of these disclosures are material to them,” the SEC said.

In their joint statement, issued Aug. 27, Jackson and Lee said that “the flexibility offered by principles-based disclosure makes sense in some cases, but the benefits of that flexibility should be carefully weighed against its costs.” Because the proposal favors flexibility over bright-line rules, it “may give management too much discretion—sacrificing important comparability—when describing a company’s investments in its workers.”

Another concern, they said, is it can “produce inconsistent information that investors cannot easily compare, making investment analysis—and, thus, capital—more expensive.” Commenters can help get this balance right “by letting us know what, if any, specific measures would be useful for investors,” Jackson and Lee said.

Climate-risk disclosure

Jackson and Lee further note in their joint statement the proposal does not seek comment on whether to include the topic of climate risk in the Description of Business under Item 101. Even though “investors of all kinds view the risk as an important factor in their decision-making process,” they said, “it remains tough for investors to obtain useful climate-related disclosure.”

Thus, commenters should weigh in as to “whether and how this topic should be included in a final rule,” Jackson and Lee wrote. “In addition, to the extent the SEC may consider whether and how additional rules should be updated to provide more transparency on climate risk, we hope commenters will provide data and analysis to help guide that important work.”