In a split decision, the Securities and Exchange Commission (SEC) has loosened requirements public companies must follow when they describe risk factors and legal proceedings in their financial statements.
The amendments to Regulation S-K, approved by the commission Wednesday a year after the changes were first proposed, signal an ongoing shift from a strict adherence to regulations to a more flexible, principles-based approach, the SEC said. Regulation S-K had not been revised in over 30 years.
The changes “will improve disclosures for investors and add efficiencies to the compliance efforts of registrants,” the SEC said in a press release announcing the results of the vote. “The amendments are also intended to improve the readability of disclosure documents, as well as discourage repetition and reduce the disclosure of information that is not material.”
The vote in favor of the amendments was 3-2, with Chairman Jay Clayton joining Commissioners Elad Roisman and Hester Peirce in favor and Allison Herren Lee and new Commissioner Caroline Crenshaw, both Democrats, voting no. Clayton is listed as independent but has close ties to the Trump administration and is currently Trump’s nominee to be the next U.S. Attorney for the Southern District of New York; Roisman and Peirce are Republican commissioners.
“Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions,” Clayton said in the statement.
The most significant change is in the risk factor disclosure requirements. Risk factor disclosures must consist of no more than two pages if the risk factor section exceeds 15 pages, and only “material” risk factors must be disclosed.
The amendment also increases the threshold from $100,000 to $300,000 for disclosing “governmental environmental proceedings resulting in monetary sanctions.” Companies can also choose another way to measure the materiality of such proceedings, “provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant.”
Companies that previously filed a general description of their business will not need to keep repeating that description, but instead only need to include “material developments that have occurred since its most recent full discussion of the development of its business.” They’ll need to provide a hyperlink to the previously filed general description.
In her dissenting opinion, Lee said the changes ignore “two critical subjects: diversity and climate risk disclosures,” which she says generally “fall under the rubric of Environmental, Social, and Governance or ESG risks.”
“It’s time for the SEC to lead a discussion—to bring all interested parties to the table and begin to work through how to get investors the standardized, consistent, reliable, and comparable ESG disclosures they need to protect their investments and allocate capital toward a sustainable economy,” she said.
Lee and former Commissioner Robert Jackson Jr. had previously expressed concern about the proposed amendments to Regulation S-K, saying the benefits of the new flexibility offered “should be carefully weighed against its costs.”
Among the concerns listed by Lee and Jackson was that the flexibility “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.”
The final amendment to Item 101 (c), description of business, had several nods to this criticism: “including as a disclosure topic, a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business”; and “refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.”