At a recent open meeting, the SEC adopted amendments to parts of Regulation S-K — – specifically relating to Item 101 (business description), Item 103 (legal proceedings) and Item 105 (risk factors). As anticipated, the amendments include increased focus on human capital.
These are the first significant amendments to these disclosure items in 30 years — and the updates have been many years in the making, as they’re part of the “disclosure effectiveness initiative” that emerged with the SEC’s 2016 concept release and continued up through last year’s proposal. These go beyond the “cleaning out the garage” amendments from a couple years ago and are intended to simplify the substantive disclosure requirements while also improving the readability of disclosure documents. The amendments shift away from prescriptive disclosures to a more principles-based disclosure framework. Here’s an excerpt from the SEC’s press release with highlights:
– Amend Item 101(a) by:
– Amend Item 101(c) by:
– Amend Item 103 by:
– Amend Item 105 by:
The Commission adopted the amendments by a 3-2 vote — Commissioners Allison Herren Lee and Caroline Crenshaw dissented. Some may have hoped for more prescriptive human capital disclosure requirements, and the two dissenting statements each express concern with the principles-based nature of the rule. In Commissioner Lee’s dissenting statement, she said she would have supported the final rule “if it had included even minimal expansion on the topic of human capital to include simple, commonly kept metrics such as part time vs. full time workers, workforce expenses, turnover, and diversity.” Commissioner Lee also cited the rule’s “ill-advised omissions” of diversity and climate change. Commissioner Crenshaw’s dissenting statement says the rule fails to deal adequately with climate change risk and human capital and suggests the Commission form an external ESG Advisory Committee to help the Commission respond to ESG trends.
One aspect of the amendments some companies likely aren’t thrilled with is the new requirement to include summary risk factor disclosure when risk factor disclosure exceeds 15 pages. Commissioner Hester Peirce’s statement says she views this change as a “bit of an experiment” and wonders whether the “penalty” of needing to prepare a summary will overcome the fear of litigation that leads companies to produce voluminous risk factor disclosures.
The rules will be effective 30 days after publication in the Federal Register, and we’ll be posting the avalanche of memos in our “Reg S-K” Practice Area. We’ll also be updating our Handbooks on these topics.
-Lynn Jokela, TheCorporateCounsel.net August 27, 2020
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