SEC Adopts Regulation S-K Amendments; Seeks to Modernize Disclosure Requirements

The U.S. Securities and Exchange Commission (the SEC) has adopted amendments to modernize disclosure requirements under Regulation S-K Items 101 (relating to the description of a registrant’s business), 103 (relating to legal proceedings), and 105 (relating to risk factors). The amendments, the first significant revisions in three decades, were undertaken as part of a comprehensive evaluation of the SEC’s disclosure requirements, and are intended to elicit improved disclosures for investors and simplify compliance for registrants. In addition, the amendments aim to improve the readability of disclosure documents and discourage repetitive or immaterial disclosure.

While the updates are intended to account for developments in the capital markets and the domestic and global economy over the past three decades, the changes reflect the SEC’s commitment to a principles-based approach to disclosures, with increased emphasis on company-specific, tailored disclosure. This approach, based in materiality, aims to facilitate understanding of a registrant’s business, financial conditions, and prospects by viewing it through the same lens through which management and the board of directors view and assess the company’s performance.

Among other things, the final amendments eliminate the prescriptive five-year period for which a registrant must provide a description of its business under Item 101(a), add a disclosure topic for a registrant’s human capital resources under Item 101(c) (to the extent material to an understanding of the registrant’s business), allow a registrant to provide disclosures for material legal proceedings under Item 103 via hyperlink or cross-reference to a disclosure located elsewhere in the document, require inclusion of a two-page summary risk factor disclosure where Item 105 risk factor disclosures exceed 15 pages in length, and alter the disclosure requirement from “the most significant” to “material” risk factors.

The final amendments, which will become effective 30 days following publication in the Federal Register, are summarized below.

Item 101(a) and (h) (Description of Business)

Summary of Existing Item Requirements

Summary of Final Amendments

Requires a description of the general development of the business of the registrant during the past five years, or such shorter period as the registrant may have been engaged in business.

Largely principles-based, requiring disclosure of information material to an understanding of the general development of the business, and eliminating the previously prescribed five-year timeframe.

Eliminates the three-year timeframe with respect to smaller reporting companies.

Clarifies that registrants, in filings made after a registrant’s initial filing, may provide an update of the general development of the business rather than a full discussion. Such update must disclose all of the material developments that have occurred since the registrant’s most recent filing containing a full discussion of the general development of its business, and incorporate by reference that prior discussion.

Item 101(c) (Description of Business)

Summary of Existing Item Requirements

Summary of Final Amendments

Requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing upon the registrant’s dominant segment or each reportable segment about which financial information is presented in its financial statements. To the extent material to an understanding of the registrant’s business taken as a whole, the description of each such segment must include disclosure of several specific matters.

Clarifies and expands the principles-based approach of Item 101(c), with a non-exclusive list of disclosure topic examples (drawn in part from the topics currently contained in Item 101(c));

To the extent such disclosures would be material to an understanding of the registrant’s business, include description of the registrant’s human capital resources; and

Refocus the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.

Item 103 (Legal Proceedings)

Summary of Existing Item Requirements

Summary of Final Amendments

Requires disclosure of any material pending legal proceedings including the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Similar information is to be included for any such proceedings known to be contemplated by governmental authorities.

Contains a threshold for disclosure based on a specified dollar amount ($100,000) for proceedings related to Federal, State, or local environmental protection laws.

Expressly state 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.

Implements a modified disclosure threshold that increases the existing quantitative threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000, but that also affords a registrant the flexibility 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 1% of the current assets of the registrant and its subsidiaries on a consolidated basis.

Item 105 (Risk Factors)

Summary of Existing Item Requirements

Summary of Final Amendments

Requires disclosure of the most significant factors that make an investment in the registrant or offering speculative or risky and specifies that the discussion should be concise, organized logically, and furnished in plain English. The Item also states that registrants should set forth each risk factor under a subcaption that adequately describes the risk. Additionally, Item 105 directs registrants to explain how each risk affects the registrant or the securities being offered and discourages disclosure of risks that could apply to any registrant.

Require summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;

Refine the principles-based approach of Item 105 by requiring disclosure of “material” risk factors; and

Require 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.

A full copy of the SEC’s final release No. 33-10825 can be found here.