On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to “modernize” its rules requiring disclosure about a company’s business description, legal proceedings and risk factors. Amendments to Items 101, 103 and 105 of Regulation S-K will:
- give a company more flexibility to tailor the description of its business to its particular circumstances;
- require a company to describe its human capital resources, including any human capital measures or objectives the company focuses on in managing its business, to the extent material to an understanding of the company’s business taken as a whole;
- eliminate or reduce disclosure about matters that are not material to an understanding of a company’s business or legal proceedings; and
- encourage risk factor disclosure that is streamlined, well-organized and limited to material risks.
The final amendments were adopted substantially as proposed by the SEC in August 2019 with certain modifications.
The amendments are part of the ongoing Disclosure Effectiveness Initiative led by the SEC’s Division of Corporation Finance (Corp Fin) to review and improve the effectiveness of its disclosure requirements for the benefit of investors and companies. It has been more than 30 years since the SEC has significantly revised Items 101, 103 and 105 of Regulation S-K. The SEC amended these items to make them more clearly principles-based as well as to enhance the readability of disclosures, discourage repetitive and immaterial disclosures and reduce the compliance burden on companies. The amendments are responsive to changes in the regulatory, business and technological environment since the adoption of Regulation S-K and increasing calls for the SEC to require human capital disclosure. The amendments also were informed by input from numerous public comment letters and Corp Fin’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. The two dissenting Commissioners, Caroline Crenshaw and Allison Herren Lee, expressed their disapproval that the release adopts “a generic and vague” principles-based disclosure requirement with respect to human capital rather than a more prescriptive approach and “is silent on two critical subjects: diversity and climate risk disclosures.”1 Commissioner Crenshaw urged the SEC to form (1) an internal task force to study how investors use information about human capital management, climate change risk and other environmental, social and governance (ESG) metrics to assess long-term financial performance and (2) an external ESG Advisory Committee composed of investors, reporting companies and subject matter experts to guide the SEC in revising and expanding its approach to, and regulation of, ESG disclosures.
The amendments are summarized in the table below. They will become effective 30 days following publication in the Federal Register.
| Disclosure Requirement | Summary of Amendment and Rationale |
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Description of Business Regulation S-K Item 101(a) and 101(c) |
Item 101(a) – Description of the General Development of the Business Item 101(a) currently requires a description of the general development of the company’s business during the past five years (or earlier if material) or such shorter period as the company may have been engaged in the business. The discussion must include the year in which the company was organized and the nature and results of any bankruptcy proceeding or any merger of the company or its significant subsidiaries and any material changes in the mode of conducting the business. Amendments
Item 101(c) – Narrative Description of the Business Item 101(c) currently requires a narrative description of the business done by a company and its subsidiaries and specifies 12 items that must be disclosed generally only if material to an understanding of the company’s business taken as a whole. The SEC has observed that many companies seem to interpret the current rule as requiring disclosure of each of the 12 specified items even if they are not relevant, which has resulted in immaterial disclosure. Amendments
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Legal Proceedings Regulation S-K Item 103 |
Item 103 currently requires disclosure of material pending legal proceedings and certain related information (e.g., the name of the court, the date instituted, the principal parties involved and the alleged factual basis underlying the proceedings). An instruction to the current rule requires disclosure of any proceedings under environmental laws to which the government is a party unless the company reasonably believes that monetary sanctions resulting from the proceeding will be less than $100,000. Amendments
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Risk Factors Regulation S-K Item 105 |
Item 105 currently requires a concise and logically organized discussion of the most significant factors that make an investment in a company’s securities speculative or risky. Under the current rule, companies must not disclose risks that could apply generically to any company and must set forth each risk factor under a subcaption that describes the risk. Amendments The amendments seek to elicit material and concise risk factor disclosure that is tailored to the company’s specific circumstances and organized in a way that gives greater prominence to the most salient risks.
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1 Here are links to the public statements about the final amendments issued by Commissioner Caroline Crenshaw and Commissioner Allison Herren Lee.
2 The SEC similarly eliminated the timeframe prescribed in Item 101(h), which currently requires smaller reporting companies to describe the development of their business during the past three years. As amended, Item 101(h) will direct smaller reporting companies, in describing the development of their business, to provide information for the period of time material to an understanding of the general development of the business.
3 The SEC adopted a corresponding amendment to Item 101(h) to permit a smaller reporting company, for filings after its initial registration statement, to provide an update to the general development of the business disclosure, instead of a full discussion, that complies with Item 101(a), including the option to provide one hyperlink to one previous filing that includes the full discussion of the general development of the company’s business.
4 SEC Chair Jay Clayton commented that, as is the case with non-GAAP financial measures, he expects companies to maintain any human capital metric definitions used constant from period to period or prominently disclose any changes to the metrics or definitions used.
5 As a model for summary risk factor disclosure, the SEC referred to the existing requirement in Form S-11.
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