SEC Modernizes Business Background DisclosuresOctober 9, 2020
On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to modernize disclosure requirements of Items 101, 103 and 105 of Regulation S-K. The revised rules were published in the Federal Register on October 8, 2020 and become effective on November 9, 2020.
As part of the SEC’s ongoing Disclosure Effectiveness Initiative, which aims to modernize and simplify disclosures that registrants are required to include in their SEC filings, the revised rules account for decades of developments as the disclosure items have not undergone significant revisions in over 30 years. Reflecting the SEC’s long-standing commitment to principle-based disclosures, the amendments are rooted in materiality and seek to elicit information that will allow investors to make more informed investment decisions. The amendments also add efficiencies to registrants’ compliance efforts, tailored to reflect registrants’ particular circumstances, and are intended to improve the readability of disclosures.
The key provisions of the revised rules are summarized as follows:
Item 101 – Description of the Business
- eliminates the previously prescribed five-year timeframe and replaces it with a materiality framework;
- permits a registrant, after its initial filing, to provide only an update of the general development of its 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; and
- is largely principle-based and requires disclosure of information material to an understanding of the general development of the business.
Item 101 (c)
- eliminates the requirement for a discussion of transactions or events that affect the registrant’s operations required in the Management’s Discussion and Analysis of Financial Conditions and Results of Operations;
- clarifies and expands its principles-based approach, with a non-exclusive list of disclosure topic examples drawn in part from topics currently contained in Item 101(c);
- includes, 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
- refocuses the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.
Item 103 – Legal Proceedings
- expressly states 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
- implements 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.
Item 105 – Risk Factors
- requires summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;
- refines the principles-based approach of Item 105 by requiring disclosure of "material" risk factors; and
- requires 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.
If you have any questions, please contact Len Essig, Kylee Emert or one of our securities attorneys.