SEC proposes to modernize Regulation S-K disclosures

The SEC said the proposed amendments are intended to improve disclosures for investors and simplify compliance efforts for registrants.

“The world economy and our markets have changed dramatically in the more than 30 years since the adoption of our rules for business disclosures by public companies,” Chairman Jay Clayton said in a statement. The proposal “reflects these significant changes, as well as the reality that there will be changes in the future,” he said.

The proposals are part of a comprehensive evaluation of the Commission’s disclosure requirements that was recommended in the staff’s “Report on Review of Disclosure Requirements in Regulation S-K.” That report was mandated by Section 108 of the JOBS Act.

Based on the recommendation from that report, the staff initiated an evaluation of the information that its rules require registrants to disclose, how this information is presented, where this information is disclosed, and how to better leverage technology as part of these efforts. The overall objective of this “Disclosure Effectiveness Initiative,” the SEC said, is “to improve our disclosure regime for both investors and registrants.”

In developing the proposed rule—all 116 pages of it—the Commission said it considered input from comment letters received in response to these disclosure modernization efforts, as well as the staff’s experience with Regulation S-K arising from the Division of Corporation Finance’s disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K.

Proposed amendments

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.

“Such a flexible approach, as opposed to prescriptive requirements, may elicit more relevant disclosures about these items,” the SEC said. The proposed amendment of Item 103 (legal proceedings) would continue the current prescriptive approach, “because that requirement depends less on the specific characteristics of registrants,” the SEC said.

A description of those proposed amendments follows.

The proposed amendment of Item 101(a) would:

• 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 amendment of Item 101(c) would:

• 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 amendment of Item 103 would:

• 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 to encourage registrants to avoid duplicative disclosure; and
• Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

The proposed amendment of Item 105 would:

• 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.

The proposal will be subject to a 60-day public comment period following its publication in the Federal Register.