United States: SEC Adopts Final Rules to Modernize Regulation S-K Disclosure

In brief

On August 26, 2020, the SEC voted 3-2 to adopt final rules to modernize the description of business, legal proceedings and risk factor disclosures required by registrants under Regulation S-K.1  The SEC noted that these disclosure items have not undergone significant revisions in over 30 years.  The final rules are intended to reflect regulatory updates and business developments, improve disclosure for investors and simplify compliance for registrants, while discouraging repetition and disclosure of immaterial information.  The final rules are substantially similar to the proposed rules that were issued by the SEC on August 8, 2019 with certain exceptions.  Under the final rules, the SEC primarily adopted a principles-based, registrant-specific approach to disclosure of information that is material to an understanding of the registrant’s business.


Overview of Final Rules

The final rules amend the description of business (Item 101), legal proceedings (Item 103) and risk factor (Item 105) disclosure requirements under Regulation S-K. Most notably, the final rules:

  • Provide registrants with more flexibility to tailor their discussion of the general development of the registrant’s business under a principles-based approach,
  • Add a new requirement for registrants to describe their human capital resources, including any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel), to the extent the information is material to an understanding of the registrant’s business taken as a whole, 
  • Increase the existing threshold for disclosure of environmental proceedings to $300,000 from $100,000, while also providing registrants with flexibility to choose a different threshold (not to exceed the lesser of $1 million or one percent of the current assets of the registrant and its subsidiaries) if reasonably designed to result in disclosure of material environmental proceedings, and 
  • Provide for more streamlined risk factor disclosure that focuses on material risks.

Applicability to Domestic Registrants and Foreign Private Issuers.  The amendments to Items 101 and 103 only impact domestic registrants and foreign private issuers that have elected to file on domestic forms subject to the Regulation S-K disclosure requirements. Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (such as Form F-1, F-3, or F-4) specifically refers to Regulation S-K.  The amendments to Item 105 will affect both domestic and foreign registrants.

Certain conforming amendments were made to Form S-4 and Schedule 14A.  The final amendments will become effective 30 days after publication in the Federal Register.

General Development of Business (Items 101(a) and (h))

Current Rules.  Item 101(a) requires a description of the general development of the registrant’s business during the past five years, or such shorter period as the registrant may have been engaged in business, with disclosure for earlier periods if material to an understanding of the general development of the business.  For smaller reporting companies, Item 101(h) generally requires a less detailed description of the development of the registrant’s business during the last three years.

In addition, Item 101(a) includes a list of prescribed topics when disclosing general business developments, including (i) the year in which the registrant was organized and its form of organization, (ii) the nature and results of any bankruptcy, receivership or similar proceedings with respect to the registrant or any of its significant subsidiaries, (iii) the nature and results of any other material reclassification, merger or consolidation of the registrant or any of its significant subsidiaries, (iv) the acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business, and (v) any material changes in the mode of conducting the business.

New Rules.  The final rules eliminate the five-year timeframe under Item 101(a) and, in the case of smaller reporting companies, the three-year timeframe under Item 101(h).  The final rules adopt a largely principles-based disclosure requirement with registrants providing disclosure of “information material to an understanding of the general development of the business” which concept is used throughout the new rules.

COMMENTARY: Registrants will need to focus on information material to an understanding of the development of their business, irrespective of a specific timeframe.  The principles-based disclosure is intended to provide registrants with flexibility to tailor their discussion, notwithstanding other disclosure requirements that have particular timeframes.

In addition, for filings made during a reporting period after a registrant’s initial filing, the registrant may provide an update of the general development of its business that discloses all of the material developments that have occurred, if any, since the most recent full discussion of the general development of its business in a previously filed registration or report and incorporate by reference to that prior filing via an active hyperlink.  Alternatively, a registrant must provide a full discussion of the general development of its business, including any material updates, in which case, the registrant would not need to incorporate by reference the prior filing.

COMMENTARY: For registrants that elect to provide an update of the general development of business disclosure for material developments that have occurred since the most recent filing containing full disclosure, it is important to note that only a single hyperlink reference to a prior filing may be used, rather than a hyperlink to multiple filings.  This approach is intended to streamline the Item 101(a) disclosure to avoid repetitive disclosure in successive filings.

In lieu of the prescribed topics under the current rules, the final rules are more principles-based by providing that disclosure topics may include, but should not be limited to, the following topics if the information is material to an understanding of the general development of a registrant’s business: (i) any material changes to a previously disclosed business strategy (newly added), (ii) the nature and effects of any material bankruptcy, receivership or similar proceeding with respect to the registrant or any of its significant subsidiaries, (iii) the nature and effects of any material reclassification, merger or consolidation of the registrant or any of its significant subsidiaries, and (iv) the acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business.

COMMENTARY: For the list of disclosure topics under the final rules, Item 101(a) includes a new disclosure topic for material changes to a registrant’s previously disclosed “business strategy” which is not defined, so that registrants have flexibility to tailor their disclosure accordingly.  The SEC noted that once a registrant has disclosed its business strategy, it would be appropriate to discuss changes to that strategy if material to an understanding of the general development of a registrant’s business.  Item 101(a) no longer includes disclosure topics for the year in which the registrant was organized and its form of organization, or material changes in the mode of conducting the registrant’s business, but such disclosure would be required if material to an understanding of the general development of the business.

Narrative Description of Business (Items 101(c))  

Current Rules.  Item 101(c) requires a narrative description of the business done and intended to be done by the registrant, 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 prescribed topics identified in Item 101(c).

New Rules.  The final rules amend Item 101(c) to clarify and expand the principles-based approach of Item 101(c), with a nonexclusive list of disclosure topic examples that replace the current list of specific items.  This list includes the following topics when describing the registrant’s dominant segment or each reportable segment about which financial information is presented in the financial statements, to the extent the information is material to an understanding of the business taken as a whole:

  • Revenue-generating activities, products and/or services, and any dependence on revenue-generating activities, key products, services, product families or customers, including governmental customers;

COMMENTARY: The SEC continues to believe that these disclosure topics would generally be material to an investment decision.

  • Status of development efforts for new or enhanced products, trends in market demand and competitive conditions; 

COMMENTARY: While the SEC did not clarify that disclosure of proprietary or other sensitive information is not required, the principles-based nature of Item 101(c) disclosure is intended to provide registrants with sufficient flexibility in how they disclose this information, to the extent material, without causing undue harm to their business operations.

  • Resources material to a registrant’s business, such as sources and availability of raw materials, and the duration and effect of all patents, trademarks, licenses, franchises, and concessions held;

COMMENTARY: Registrants should be focused on disclosure of all resources material to their business, understanding that although disclosure of the availability of raw materials may not be applicable to certain registrants whose business is technology-based or intangible-based, such registrants should follow the principles-based approach disclosure of Item 101(c).  Also note that the SEC did not expand the disclosure topic to include the duration and effect of copyright and trade secret protections as previously proposed, but limited this topic to patents, trademarks, licenses, franchises, and concessions held.

  • A description of any material portion of the business that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government; and

COMMENTARY: The SEC continues to believe this disclosure topic when material to a business is important for investors.

  • The extent to which the business is or may be seasonal.

COMMENTARY: The SEC retained this disclosure topic to address the potential loss of information in the fourth quarter concerning seasonality because this disclosure may not be required under U.S. GAAP.

Two important changes were made to Item 101(c) for disclosure of the material impact of compliance with all material government regulations (no longer limited to disclosure of the impact of environmental regulations) and new human capital disclosure (no longer limited to the number of the number of persons employed by the registrant).  Item 101(c) will require disclosure of the following topics to the extent material to an understanding of the registrant’s business taken as a whole (or, if the information is material to a particular segment, then that segment should be identified):

  • The material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries, including the estimated capital expenditures for environmental control facilities for the current fiscal year and any other material subsequent period; and

COMMENTARY: This disclosure topic reflects the common practice of many registrants to voluntarily disclose all material government regulations material to their business given that similar disclosure is generally required under the Management’s Discussion and Analysis (MD&A) section of the registrant’s annual report or financial statements.

  • A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).

COMMENTARY: As a new disclosure requirement and in response to the increasing importance of human capital to investors, registrants will be required to describe, to the extent material to an understanding of the registrant’s business taken as a whole, the registrant’s human capital resources, including any human capital measures or objectives that the registrant focuses on in managing the business.  The final rules provide non-exclusive examples of measures or objectives that may be material to a registrant, including those that address the development, attraction and retention of personnel, depending on the nature of the registrant’s business and workforce.  Each registrant’s disclosure will need be tailored to its unique business, workforce and facts and circumstances.

The SEC adopted a more principles-based approach, rather than a prescriptive approach, to human capital disclosure recognizing that the exact measures and objectives to be disclosed may evolve over time and may depend, and vary significantly, based on various factors, including the industry, the various regions or jurisdictions in which the registrant operates, the general strategic posture of the registrant (including the extent to which the registrant is vertically integrated) and the then-current macroeconomic and other conditions affecting human capital resources, such as national or global health matters.  The final rules do not define “human capital” which may evolve over time and be defined differently by companies that may be industry specific.

While the final rules retain the existing disclosure requirement for the number of persons employed by the registrant, under the principles-based approach, if, for example, a measure of a registrant’s part-time employees, full-time employees, independent contractors and contingent workers, and employee turnover, in all or any portion of the registrant’s business would be material to an understanding of the registrant’s business, then such information would need to be disclosed.

Legal Proceedings (Item 103)

Current Rules.  Item 103 requires disclosure of any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant is a party or with respect to the registrant’s property, 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 required for any such proceedings known to be contemplated by governmental authorities.  Item 103 includes a threshold for disclosure of $100,000 for proceedings related to Federal, State or local environmental protection laws.

New Rules.  The required information under Item 103 may be provided by hyperlink or cross-reference to the legal proceedings disclosure located elsewhere in the document to avoid repetitive disclosure, such as in the MD&A or Risk Factors section or notes to the financial statements.  In addition, the final rules provide a modified disclosure threshold that increases the existing threshold for disclosure of environmental proceedings to $300,000 from $100,000, but also provide a registrant with flexibility to choose a different threshold if reasonably designed to result in disclosure of material environmental proceedings, so long as the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant and its subsidiaries on a consolidated basis.  If a registrant selects a threshold other than the $300,000 threshold, then this threshold (including any change thereto) must be disclosed in each annual and quarterly report of the registrant.

COMMENTARY: The modified disclosure threshold for environmental proceedings permits registrants to use a company-specific disclosure threshold that may be more relevant to their particular circumstances.

Risk Factors (Item 105)

Current Rules.  Item 105 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. In addition, registrants should set forth each risk factor under a subcaption that adequately describes the risk. Registrants should explain how each risk affects the registrant or the securities being offered and avoid disclosure of risks that could apply generically to any registrant or any offering.

New Rules.  The final rules make certain changes to the current risk factor disclosure:

  • If a registrant’s risk factor disclosure exceeds 15 pages, then the registrant will be required to provide a summary of risk factor disclosure, not to exceed two pages forepart of the document.  The summary of risk factor disclosure must be in the form of a series of concise, bulleted or numbered statements that summarize the principal factors that make an investment in the registrant or offering speculative or risky.

COMMENTARY: If a summary of risk factor disclosure is required, the summary does not need to contain all of the risk factors identified in the full risk factor discussion, but rather registrants may prioritize certain risks and omit others.

  • The final rules require disclosure of “material” factors that make an investment in the registrant or offering speculative or risk, rather than the “most significant” factors as required under the current rules. 

COMMENTARY: This change in the standard from the “most significant” factors to “material” factors is intended to address the length of, and increase in the number of, risks disclosed in recent years, while encouraging registrants to focus on disclosing risks that reasonable investors would consider important in making investment or voting decisions.

  • Risk factors must 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 being disclosed at the end of the risk factor section under a separate caption entitled “General Risk Factors.”

COMMENTARY: The final rule does not specify any risk factor headings that registrants should use, except for the “General Risk Factors” heading at the end of the risk factor section to describe risk factors that could apply generally.  The SEC noted that if a registrant includes one or more risk factors under the “General Risk Factors” heading, that fact, by itself, should not affect the availability of the safe harbor under the Private Securities Litigation Reform Act of 1995 (PSLRA).  Registrants are encouraged to customize their risk factor disclosures to emphasize the particular relationship of the risk to the registrant or the offering and avoid the need to include disclosure under the general risk heading.  Registrants are also free to prioritize the order in which they disclose their risk factors.

If you have any questions on the topics covered or need further clarification on any particular issue, please do not hesitate to get in touch with your Baker McKenzie attorney.


1 https://www.sec.gov/rules/final/2020/33-10825.pdf


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