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SEC Modernizes Regulation S-K Disclosure Requirements for Business Description, Legal Proceedings & Risk Factors

Client Updates

On August 26, 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to modernize the description of business (Item 101), legal proceedings (Item 103) and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K (available here). The amendments also add a requirement to make disclosure regarding human capital.

The changes continue the SEC’s trend toward principles-based disclosures and provide companies with more flexibility to tailor their disclosures about their business to what is material to that business. The changes also eliminate redundant disclosures and encourage companies to streamline and better organize their risk factor disclosures.

In adopting the amendments, the SEC noted the breadth of changes in the regulatory, business and technological environment since the adoption of Regulation S-K. The amendments also were informed by input from numerous public comment letters and the Division of Corporation Finance’s disclosure review process, including a review of disclosures companies made in response to the COVID-19 pandemic.

The final amendments were adopted by a 3-2 vote, with the two dissenting Commissioners, Caroline Crenshaw and Allison Herren Lee, claiming that the amendments did not adequately address diversity and climate risk, despite significant investor interest and asserting that the application of principles-based requirements to climate change and human capital does not ensure that companies have considered the materiality of those issues.

The amendments are summarized below and will go into effect 30 days after publication in the Federal Register. 

Item 101 (Description of Business)

Item 101(a) (General Development of Business)

The revised Item 101(a) is largely principles-based, requiring disclosure of information material to an understanding of the general development of the business. The amendments will:

  • eliminate the prescribed five-year look-back disclosure requirement; and
  •  permit a company, after its initial Securities Act or Exchange Act filing is made, to provide only an update of the general development of the business with a focus on material developments, if any, in the reporting period, and to incorporate by reference through a hyperlink to the company’s most recently filed disclosure that, together with the update, set forth the full discussion of the general development of the company’s business.

Item 101(c) (Narrative Description of Business)

The amendments will shift to a more principles-based approach by encouraging companies to exercise judgment with respect to the matters on which they focus their disclosures. The amendments to Item 101(c):

  • revise and expand the non-exclusive list of disclosure topic examples1, including revenue-generating activities, products and services, resources material to the company’s business (e.g., raw materials and intellectual property) and material effects of compliance with governmental regulations on capital expenditures, earnings and competitive position;

    • Despite numerous recommendations from commentators on the subject, the SEC did not expand the requirement to disclose the number of employees to prescribe disclosure of additional metrics (e.g., the breakdown of full-time, part-time and contingent workers, and employee turnover).
  • expand the regulatory compliance requirement beyond environmental laws to include material government regulations; and
  • require, to the extent material, new disclosures regarding “human capital resources,” which includes any human capital measures or objectives that management focuses on in managing the business. Depending on the nature of the company’s business and workforce, this would require disclosure of measures or objectives that address the attraction, development and retention of personnel.

    • The SEC decided not to define the term “human capital” as it may evolve and be used differently depending on the company’s industry.
    • In contrast to the initial proposed amendments, the SEC decided to require disclosure, to the extent material, of the number of employees, as currently required. It believes that figure can help investors assess the size and scale of operations as well as changes over time, and provide context to any discussion of human capital management.

Item 103 (Legal Proceedings)

Under the amendments, disclosures made pursuant to revised Item 103 will:

  • 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 a company’s filing (e.g., MD&A, risk factors or the notes to the financial statements) in an effort to encourage companies to avoid duplicative disclosure; and
  •  increase the threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000, unless the Company selects a different threshold. Any alternative threshold must be reasonably designed (as determined by the company) to result in disclosure of material environmental proceedings, any may not exceed the lesser of $1 million or 1% of the currents assets of the company and its subsidiaries on a consolidated basis.

Item 105 (Risk Factors)

The SEC has found that many companies’ risk factors have progressively become longer and often include generic risks that could apply to any offering or company. The amendments to Item 105 encourage companies to provide more focused disclosure about the company’s risk profile and require:

  • if the risk factor section exceeds 15 pages, the inclusion of a series of short, concise, bulleted or numbered statements summarizing the principal risk factors (which can be no longer than two pages);
  • discussion of “material” factors in lieu of the “most significant factors”; and
  • risk factors to be grouped 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 the caption, “General Risk Factors.”

We expect the amendments to Items 101, 103, and 105 of Regulation S-K to permit companies to make more fulsome tailored disclosures specific to their businesses. We encourage companies to consult with counsel to determine what modifications and adjustments should be made to current disclosures in Securities Act and Exchange Act filings in response to these new amendments.

1Item 101(c) currently requires a narrative description of the business conducted and intended to be conducted by the company and its subsidiaries, focusing upon the company’s dominant segment or each reportable segment about which financial information is presented in the financial statements, and includes 12 specific items that must be discussed, to the extent material to an understanding of the company’s business. Because the 12 items are generally not applicable to all companies, they can elicit discussions that are not material to a company.

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