SEC adopts amendments to modernize Reg S-K requirements for business, legal proceedings and risk factor disclosures (UPDATED)
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
By a vote of three to two, on Wednesday, the SEC voted to adopt amendments, substantially as proposed with some modifications, to modernize the Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors. As Chair Jay Clayton observed in his Statement, these Reg S-K disclosure items “essentially have not changed in over 30 years,” but much has changed in our economy since that time, making these updates well warranted. The changes are a component of the SEC’s Disclosure Effectiveness Initiative and reflect public comments on the SEC’s 2016 Concept Release (see this PubCo post) and the 2019 Reg S-K proposal (see this PubCo post), as well as experience from the staff’s disclosure review process. In devising the final amendments, the SEC considered the “many changes that have occurred in our capital markets and the domestic and global economy” since the requirements were adopted. The amendments largely reflect the SEC’s historic “commitment to a principles-based, registrant-specific approach to disclosure” that, although “prescriptive in some respects,” is “rooted in materiality” and designed to provide an understanding of a company’s business through the lens that management and the board apply in managing and assessing the company’s performance. While there are changes throughout, the most significant change is the enhancement of the disclosure requirement for human capital, a topic that has been front-burnered by the impact of COVID-19 on the workforce. How substantially disclosure changes as a result of these amendments remains to be seen. The amendments will become effective 30 days after publication in the Federal Register.
At the end of last week, the SEC voted, without an open meeting, 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 SEC’s “Disclosure Effectiveness Initiative.” In crafting the proposal, the SEC took into account comments received on the 2016 Concept Release on disclosure simplification and modernization (see this PubCo post), as well as Corp Fin staff experience in review of disclosures. The changes to the rules were proposed “in light of the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since their adoption, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, which may affect the relevance of current disclosure requirements, changes in technology (in particular the availability of information), and changes such as inflation that have occurred simply with the passage of time.” There is a 60-day comment period.
As previously discussed in this PubCo post, one of the risk areas that SEC staff have advised they will be monitoring and have urged companies to address—and soon—is the effect of the LIBOR phase-out. LIBOR, the London Interbank Offered Rate, is calculated based on estimates submitted by banks of their own borrowing costs. In 2012, the revelation of LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out by 2021. LIBOR has been used extensively as a benchmark reference for short-term interest rates for various commercial and financial contracts—including interest rate swaps and other derivatives, as well as floating rate mortgages and corporate debt. As cited by SEC Chair Jay Clayton, according to the Fed, “in the cash and derivatives markets, there are approximately $200 trillion in notional transactions referencing U.S Dollar LIBOR and…more than $35 trillion will not mature by the end of 2021.” (See also this PubCo post.)
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