SEC Issues Proposal to Modernize Regulation S-K Disclosures on Description of a Registrant’s Business, Legal Proceedings, and Risk Factors; Nareit Task Force to be Formed
On Aug. 8, the Securities and Exchange Commission (SEC) issued a proposed rule (Proposal) that would modernize the description of a business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosure requirements in Regulation S-K. These disclosure items have not undergone significant revisions in over 30 years. If you are interested in participating in a Nareit task force that will evaluate the Proposal and consider whether Nareit should comment, please RSVP here by Aug. 23. Comments are due to the SEC 60 days after the Proposal is published in the federal register.
Nareit has long endorsed the SEC’s ongoing Disclosure Effectiveness Project to address outdated and duplicative disclosures. The Proposal, which is part of this on-going initiative, is intended to update and modernize the SEC rules for disclosing the descriptions of business, legal proceedings and risk factors in Reg S-K, to improve these disclosures for investors, and to simplify compliance costs for registrants. The SEC’s 2016 Concept Release requested comment on whether the disclosure rules should be more principles-based or more prescriptive. Reflecting public comments received – including Nareit’s – this Proposal reflects a more principles-based approach to the business and risk factor disclosure requirements. However, the revisions to the disclosures related to legal proceedings, which are less extensive, remain largely prescriptive.
Perhaps the most novel feature of the Proposal is the addition of “human capital” as a component of the business description disclosure, to the extent it is material. In the release accompanying the Proposal, the SEC notes that it received many comments advocating human capital disclosure and that it also received a rulemaking petition in 2017, filed by the Human Capital Management Coalition, a labor union group, requesting that it propose new regulations to require all issuers to disclose human capital management practices and policies.
The Proposal would replace existing requirement that issuers disclose the number of employees with a requirement to disclose, to the extent material, a “description of the registrant’s human capital resources, including in such description any human capital measures or objectives that management focuses on in managing the business (e.g., depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel).” The Proposal states that this change would enable investors “to better understand and evaluate this company resource and to see through the eyes of management how this resource is managed.”
Item 101 - Description of a Business
The Proposal would revise Item 101(a) to be largely principles-based, requiring:
- Disclosure of information material to an understanding of the general development of the business and eliminating a prescribed timeframe for this disclosure; and,
- In filings made after a registrant’s initial filing, only an update of the general development of the business with a focus on material developments in the reporting period with a hyperlink to the registrant’s most recent filing (e.g., initial registration statement or more recent filing if one exists) that, together with the update, would contain the full discussion of the general development of the registrant’s business.
The Proposal would revise Item 101(c) to:
- Clarify and expand its principles-based approach, with disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
- Per above, include as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business; and,
- Refocus the regulatory compliance requirement by including material government regulation, not just environmental laws, as a topic.
Item 103 - Legal Proceedings
The Proposal would revise Item 103 to:
- Expressly state that the required information may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and,
- Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.
Item 105 - Risk Factors
The Proposal would revise Item 105 to:
- Require summary risk factor disclosure if the risk factor section exceeds 15 pages;
- Refine the principles-based approach of Item 105 by changing the disclosure standard from the “most significant” factors to the “material” factors; and,
- Require risk factors to be organized under relevant headings, 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.