Although the SEC cancelled the scheduled open meeting (again), it still went ahead and voted to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the “Disclosure Effectiveness Initiative.” As described in the press release, to enable each business to focus on the matters that are material to that business, the proposed amendments take a more principles-based approach to the business and risk factors disclosure requirements. With regard to legal proceedings, the proposal would “continue the current prescriptive approach because that requirement depends less on the specific characteristics of registrants.” There is a 60-day comment period.
The proposed changes are summarized below (based on the fact sheet—to be updated later based on the proposing release):
Development of business (Item 101(a))
- Provides a non-exclusive list of types of information, which the company would be required to disclose only to the extent the information would be material to an understanding of the general development of the business;
- Includes as one of the listed topics “transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy”;
- Eliminates a prescribed timeframe for this disclosure; and
- Permits the company, in subsequent filings, to provide only an update focused on material developments in the reporting period, along with an active link to the most recent filing, so that together the disclosure would provide the full discussion of the general development of the business.
Business narrative (Item 101(c))
- Includes a list of principles-based disclosure topics drawn from those in current 101(c);
- Includes as one of the topics, to the extent material, human capital, “including any human capital measures or objectives that management focuses on in managing the 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
- Expands the regulatory compliance requirement beyond environmental regs to include “material government regulations.”
Legal proceedings (Item 103)
- Expressly permits hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document to discourage duplication; and
- Raises the $100,000 disclosure threshold for environmental proceedings involving the government to $300,000.
Risk Factors (Item 105)
- Requires a summary of the risk factor section if the actual section exceeds 15 pages;
- Changes the disclosure standard from “most significant” factors to “material” factors; and
- Requires organization of the risks under relevant headings, with risks applicable generally to an investment in securities located at the end under a separate caption.