On Track to Modernize SEC Disclosures

By Arda Barlas

Recent Development

On August 8, 2019, the Securities and Exchange Commission (“SEC”) announced a proposal for amendments to update Regulation S-K. The new set of rules is intended to simplify compliance efforts of registrants and improve disclosures for investors. The rationale behind these new rules is the dramatic change in the world economy and markets over the past 30 years when public companies’ business disclosure rules were adopted.

The SEC plans to achieve this rationale by modernizing the description of business, legal proceedings, and risk factor disclosures under Regulation S-K.

According to the proposal, the SEC considered input from comment letters received in response to these disclosure modernization efforts, the staff’s experience, and changes in the regulatory and business landscape since the adoption of Regulation S-K.

What Does the Proposal Say?

Mainly, the proposal foresees amendments for the following items:

General development of the business (101(a))

The proposed revision for Item 101(a) requires the disclosure of a topic to the extent such information is material to an understanding of the general development of a registrant’s business. In such cases, the information will be deemed material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.  Moreover, providing a prescribed time frame for this disclosure is intentionally avoided. Also, the proposed revision for Item 101(a) provides a non-exclusive list of the types of information that a registrant may need to disclose.

Another important update is that the proposed revision for Item 101(a) allows 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. However, such update should be accompanied with an active hyperlink to the registrant’s most recent filing and along with the update, the full discussion of the general development of the registrant’s business must be present.

Description of the business (101(c))

The proposed revision for Item 101(c) includes human capital resources as a disclosure topic. This topic includes any human capital measures or objectives that management focuses on in managing the business. Again, the extent of such disclosures are limited to materiality. Moreover, the regulatory compliance requirement was extended, as against being limited to environmental provisions, by including new material government regulations.

Legal proceedings (103)

The revision proposed for Item 103, which deals with legal proceedings is designed to encourage registrants to avoid duplicative disclosure. The required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosures located elsewhere in the document. This will provide more reader-friendly legal proceedings sections and reduce the complexity or confusion significantly.

Moreover, the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to is proposed to be raised to $300,000. The rationale behind this threshold raise is to adjust for inflation.

Risk factor (105)

The proposal requires a new structure for risk factors to be organized under relevant headings, along 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. Also, the disclosure standard is proposed to be changed from the “most significant” factors to the “material” factors. Also, if the risk factor section is longer than 15 pages, the summary risk factor disclosure will be required to be disclosed.