August 28, 2020Client Alert

SEC Modernizes Regulation S-K Disclosure Requirements for Business, Legal Proceedings, and Risk Factors

On August 26, 2020, the Securities and Exchange Commission (SEC) announced that it had adopted amendments to the Regulation S-K disclosure requirements for: business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105), which have remained nearly unchanged for over 30 years despite changes in capital markets and the domestic and global economy. The changes are designed to more clearly present each registrant’s business, financial condition, and prospects, by tailoring the disclosures to reflect each registrant’s specific circumstances. The press release noted that the disclosure requirements are less prescriptive and make compliance efforts more effective for registrants because the information is presented in a way that management and the board of directors are already using to assess performance. In addition, the changes improve disclosures for investors by improving readability, discouraging repetition and decreasing immaterial information.

SEC Chairman Jay Clayton stated that “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.”

Commissioner Elad L. Roisman said that the amendments “will allow our public reporting companies to present more clearly the information that they consider material in running their businesses. Such a shift away from dated, prescriptive disclosure requirements to a more principles-based disclosure regime will have tremendous benefits for investors who will now be able to focus their attention on material information that better captures the circumstances of each particular company.”

Commissioners Allison Herren Lee and Caroline Crenshaw dissented, with Lee noting that the rule was “silent on two critical subjects: diversity and climate risk disclosures.”


The final amendments:

  • Amend Item 101(a) by:
    • Making it principles-based, requiring disclosure of material information to understand the general development of the business
    • Replacing the previously prescribed five-year timeframe with a materiality framework
    • Allowing a registrant, after the initial filing, to provide only an update of the material developments of the business that have occurred since its most recent full discussion of the business development, which may be incorporated by reference
  • Amend Item 101(c) by:
    • Expanding its principles-based approach, with a non-exclusive list of disclosure topic examples from topics currently contained in Item 101(c)
    • Including the disclosure topic of “human capital resources” to the extent they would be material to understanding the business
    • Refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws
  • Amend Item 103 by:
    • Allowing the required information to be provided by hyperlink or cross-reference to legal proceedings disclosed elsewhere in the document to avoid repetition
    • Changing the disclosure threshold for certain governmental environmental proceedings resulting in monetary sanctions, from $100,000 to $300,000, and allowing the registrant to select a reasonable threshold to disclose material environmental proceedings, provided the threshold does not exceed the lesser of $1 million or one percent of its current assets
  • Amend Item 105 by:
    • Setting a two-page maximum for summary risk factor disclosure if the risk factor section exceeds 15 pages
    • Requiring disclosure of “material” risk factors
    • Requiring relevant headings for risk factors, in addition to the required sub-captions, with any risk factors that apply to a securities investment to be disclosed at the end of the risk factor section under a separate caption

See the SEC Final Rule here. The rule will be effective 30 days after its publication in the federal register.

Michael Best’s Securities & Capital Markets team has experts who advise public companies, broker-dealers, and investment advisors on compliance with the SEC regulations. Please do not hesitate to contact a member of the Securities & Capital Markets team for additional information on these changes and what they may mean for your securities disclosures.

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