On Aug. 26, the Securities and Exchange Commission (SEC) adopted amendments to modernize the Regulation S-K disclosure requirements related to the description of business (Item 101), legal proceedings (Item 103), and risk factors (Item 105). Nareit has long endorsed the SEC’s ongoing Disclosure Effectiveness Initiative to address outdated, duplicative, and confusing disclosure obligations. Nareit submitted an Oct. 22, 2019 comment, developed by a task force of Nareit members, supporting the SEC’s proposed amendments that formed the basis of this final rule. In its comment, Nareit endorsed the principles-based, issuer-specific approach to disclosure reflected in the proposed amendments, which included several changes that Nareit had recommended in its comment on the 2016 Concept Release on Business and Financial Disclosure Required by Regulation S-K. Many of these suggested changes are reflected in the final amendments (the release accompanying the amendments includes several citations to Nareit’s comment), which become effective 30 days after publication in the Federal Register.

The SEC adopted these amendments to Regulation S-K by a 3-2 vote, with both of the Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, dissenting. Each expressed concerns with what Commissioner Lee, in her statement, termed the “ill-advised omissions” of prescriptive disclosure requirements related to human capital, diversity, and climate change. Commissioner Crenshaw suggested in her statement that the SEC form an external ESG Advisory Committee to address these issues. However, as described below, the amendments do add a new requirement to Item 101(c) requiring that issuers disclose human capital resources, to the extent such disclosures are material to an understanding of the issuer's business.

Highlights of the amendments include the following changes:

Item 101(a) (General Development of the Business)

  • Imposes a principles-based framework, requiring disclosure of information material to an understanding of the general development of the business;
  • Replaces the previously prescribed five-year timeframe with a materiality framework; and,
  • Permits issuers to provide only an update of the general development of the business focused on material developments in filings subsequent to the issuer’s initial filing.

Item 101(c) (Narrative Description of the Business)

  • Clarifies and expands the SEC’s “principles-based” approach, with an updated list of non-exclusive disclosure topics examples;
  • Includes a new requirement that issuers describe human capital resources to the extent such disclosures would be material to an understanding of the issuer's business; and,
  • Require disclosure of “all material government regulations,” rather than only environmental laws.

Item 103 (Legal Proceedings)

  • Permits issuers to provide information by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document (e.g., financial statement footnotes); and,
  • Modifies the disclosure threshold for certain governmental environmental proceedings resulting in monetary sanction by increasing the existing quantitative threshold from $100,000 to $300,000, while also permitting issuers to select a different threshold, which it reasonably determines will provide material disclosure, provided that the threshold does not exceed the lesser of $1 million or 1% of the issuer’s current assets.

Item 105 (Risk Factors)

  • Imposes a principles-based approach by requiring disclosure of “material” risk factors;
  • Requires a risk factor “summary” of no more than two pages if the risk factor section exceeds 15 pages; and
  • Requires risk factors to be organized under relevant headings in addition to the sub-captions currently required, with any risk factors applicable to an investment in securities disclosed at the end of the risk factor section under a separate caption.

Please do not hesitate to contact Nareit’s Senior Vice President for Regulatory Affairs and Deputy General Counsel Victoria P. Rostow (vrostow@nareit.com); Nareit’s Senior Vice President for Financial Standards Christopher T. Drula (cdrula@nareit.com); or Nareit’s Senior Vice President for Financial Standards George L. Yungmann (gyungmann@nareit.com) with any questions that you may have about these amendments to Regulation S-K, or related matters.