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SEC Proposes Amendments to Regulation S-K to Modernize Disclosure Related to Description of Business, Legal Proceedings and Risk Factors

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On August 8, 2019, the U.S. Securities and Exchange Commission (the "SEC") proposed 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 (available here). The proposed amendments are intended to update the rules to improve the readability of these disclosures for investors, simplify compliance efforts for registrants and take a more principles-based approach to the business and risk factor disclosure requirements. All proposed amendments would apply to domestic registrants. The proposed amendments to Item 105 (Risk Factors) would also apply to foreign private issuers while the amendments to Item 101 (Description of Business) and Item 103 (Legal Proceedings) would not. The proposed amendments will have a 60-day public comment period following their publication in the Federal Register.

Item 101 (Description of Business)

Item 101(a) (General Development of Business)

Item 101(a) currently requires a description of the general development of the company’s business during the past five years. The proposed changes are designed to provide companies with the flexibility to tailor their disclosures to their individual circumstances and make it easier for investors to focus on material updates to the business. The proposed amendments to Item 101(a) would introduce the following changes:

  • eliminate the prescribed five-year disclosure timeframe and instead require companies to focus only on information material to an understanding of the development of their business;
  • permit a company, after its initial Securities Act or Exchange Act filing is made, to provide only an update of the general development of the business with a focus on material developments, if any, in the reporting period, and a hyperlink to the company's most recently filed disclosure that, together with the update, set forth the full discussion of the general development of the company's business; and
  • provide 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. The SEC is proposing to include as a listed disclosure topic, to the extent material to the understanding of the company's business, "transactions and events that affect or may affect the company's operations, including material changes to a registrant's previously disclosed business strategy."

Item 101(c) (Narrative Description of Business)

Item 101(c) currently requires a narrative description of the business conducted and intended to be conducted by the company and its subsidiaries, focusing upon the company's dominant segment or each reportable segment about which financial information is presented in the financial statements, and includes twelve specific items that must be discussed, to the extent material to an understanding of the company's business. Because the twelve items are generally not applicable to all companies, they can elicit discussions that are not material to a company. The SEC is proposing to amend Item 101(c) to be more principles-based by encouraging companies to exercise judgment with respect to the matters on which they focus their disclosures. The proposed amendments to Item 101(c) are as follows:

  • provides a non-exclusive list of topics that a company may need to disclose, which is derived from a subset of topics currently included in Item 101(c) (disclosure about new segments and dollar amount of backlog orders believed to be firm would no longer be listed as potential disclosure topics under this Item) and such disclosure would only be required to the extent such information is material to an understanding of the general development of a company's business taken as a whole;
  • expands the regulatory compliance requirement beyond environmental laws to include material government regulations; and
  • includes human capital resources as a separate disclosure topic, to the extent such disclosure would be material to an understanding of the company's business.

Based on the understanding that human capital is an "important resource and driver of performance for certain companies," the proposed rule would replace the current requirement to disclose the number of employees with a requirement that the company describe its human capital resources, including, to the extent material, any human capital measures or objectives that management focuses on in managing the business. The proposed rule provides examples by referring to measures or objectives that address the attraction, development and retention of personnel. The intent of the proposed requirement is to encourage human capital resource disclosures that allow investors to better understand and evaluate the company's human capital resources and to see through the eyes of management how each company manages its workforce.

Item 103 (Legal Proceedings)

Item 103 currently requires disclosure of any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the company or any of its subsidiaries is a party. Under the proposed amendments, Item 103 would be revised to:

  • expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in a company's filing (e.g., MD&A, risk factors or the notes to the financial statements) in an effort to encourage companies to avoid duplicative disclosure; and
  • increase the threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000 to adjust for inflation.

Item 105 (Risk Factors)

Item 105 currently requires disclosure of the most significant factors that make an investment in the company or offering speculative or risky and specifies that the discussion should be organized logically. However, the SEC has found that many companies' risk factors have progressively become longer and often include generic risks that could apply to any offering or company. The proposed amendments to Item 105 would include the following requirements to encourage companies to provide a more focused disclosure about the company's risk profile:

  • require summary risk factor disclosure if the risk factor section exceeds 15 pages, which would include a series of short, concise, bulleted or numbered statements summarizing the principal risk factors;
  • replace the requirement to discuss the "most significant" factors with "material" factors; and
  • require risk factors to be grouped under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under the caption, "General Risk Factors."

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