SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K

The Securities and Exchange Commission today announced that it voted to adopt 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. These disclosure requirements have not undergone significant revisions in over 30 years. The amendments the Commission is adopting today update these items to reflect the many changes in our capital markets and the domestic and global economy in recent decades.

"Today we modernized our public company business disclosure rules for essentially the first time in over 30 years," said SEC Chairman Jay Clayton. "Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit information that will allow today's investors to make more informed investment decisions. I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value. I applaud the staff for their dedication and thoughtful approach to modernizing and improving these rules and adding efficiency and flexibility to our disclosure framework."

Many of the amendments reflect the Commission's long-standing commitment to a principles-based, registrant-specific approach to disclosure. These disclosure requirements, while prescriptive in some respects, are rooted in materiality and are designed to facilitate an understanding of each registrant's business, financial condition, and prospects. The rules are designed for this information to be presented on a basis consistent with the lens that management and the board of directors use to manage and assess the registrant's performance.  The modernization of Items 101, 103, and 105 is intended to elicit improved disclosures, tailored to reflect registrants' particular circumstances, which are designed will improve disclosures for investors and add efficiencies to the compliance efforts of registrants. The amendments are also intended to improve the readability of disclosure documents, as well as discourage repetition and reduce the disclosure of information that is not material.

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FACT SHEET

Modernization of Regulation S-K Items 101, 103, and 105

Aug. 26, 2020

Background

On Aug. 8, 2019, the Commission proposed amendments to modernize the disclosure requirements in Items 101, 103, and 105 of Regulation S-K. The proposals were part of a comprehensive evaluation of the Commission's disclosure requirements that was recommended in the staff's Report on Review of Disclosure Requirements in Regulation S-K ("S-K Study"). The S-K Study was mandated by Section 108 of the Jumpstart Our Business Startups Act ("JOBS Act"). Based on the S-K Study's recommendation, the staff initiated an evaluation of the information our rules require registrants to disclose, how this information is presented, where this information is disclosed, and how we can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”). The overall objective of the Disclosure Effectiveness Initiative was to improve our disclosure regime for both investors and registrants.

In developing the proposed amendments, the Commission considered input from comment letters received in response to these disclosure modernization efforts. The Commission also took into account the staff's experience with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K.

In response to the proposed amendments, we received numerous comment letters, and after considering all of the public comments received, the Commission is adopting the amendments substantially as proposed with certain modifications.

Highlights

The final amendments will, among other things:

• amend Item 101(a) by:
  • making it largely principles-based, requiring disclosure of information material to an understanding of the general development of the business;
  • replacing the previously prescribed five-year timeframe with a materiality framework; and
  • permitting a registrant, in filings made after a registrant's initial filing, to provide only an update of the general development of the business focused on material developments that have occurred since its most recent full discussion of the development of its business, which will be incorporated by reference;
• amend Item 101(c) by:
  • clarifying and expanding its principles-based approach, with a non-exclusive list of disclosure topic examples drawn in part from topics currently contained in Item 101(c);
  • including, as a disclosure topic, a description of the registrant's human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business; and
  • refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws;
• amend Item 103 by:
  • expressly stating that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure; and
  • implementing a modified disclosure threshold for certain governmental environmental proceedings resulting in monetary sanctions that increases the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, but that also affords a registrant some flexibility by allowing the registrant, at its election, to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant; and
• amend Item 105 by:
  • requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;
  • refining the principles-based approach of Item 105 by requiring disclosure of "material" risk factors; and
  • requiring risk factors to be organized under relevant headings in addition to the subcaptions currently required, 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.

What’s Next?

The amendments will be effective 30 days after publication in the Federal Register.