On August 26, 2020, the Securities and Exchange Commission amended its rules and forms to revise several disclosure requirements applicable to reporting companies.1 The amendments address three items of Regulation S-K that had not been revised for more than 30 years:

  • the description of the company's business (Item 101),
  • the description of legal proceedings (Item 103), and
  • risk factors (Item 105).

The amendments will be effective 30 days after the date of publication in the Federal Register. The short timeframe makes sense, since the amendments generally remove or simplify disclosure requirements. On two points, however, they add requirements: most companies will now have to provide a description of human capital resources, and many companies will need to change how they present risk factors. A reporting company with a Form 10-K deadline looming will need to work quickly to address those changes. Otherwise, reporting companies can generally wait until the next 10-K to address the amendments.

The amendments were proposed on August 8, 2019,2 following up on an April 2016 concept release3 that asked about the value to investors of the disclosures companies provide under the SEC's rules. See the box at right for some background on the SEC's program of reforming its disclosure requirements.

What the Amendments Do

Description of Business

Item 101 of Regulation S-K governs the general description of the company's business in an annual report on Form 10-K or in a registration statement, for example in an IPO. Practices in addressing the existing requirement vary dramatically: a seasoned reporting company might provide just a few pages sketching the salient points about its recent developments, while in IPOs and in some industries the length and detail are significantly greater.

The amendments make the following changes, each intended to encourage more streamlined disclosure.

  • Item 101(a) calls for a description of the "general development" of the business.
    • The prior rule required the discussion to cover a five-year timeframe, and that has been eliminated. For annual reports, the change is minor since Form 10-K already provides that this discussion can be limited to developments since the beginning of the fiscal year.
    • The new rule permits the discussion to be limited to an update, covering developments since the most recent full discussion. If a company takes this approach, it will need to identify a single filing containing the full discussion, incorporate that by reference and provide an active hyperlink.

Background – The Disclosure Effectiveness Initiative

Since 2012, the SEC has undertaken a program of regulatory reform to simplify and update disclosure requirements for public companies. It has been using the term Disclosure Effectiveness Initiative for this program, which derives partly from Congressional mandates in the JOBS Act (2012) and the FAST Act (2015) and partly from the priorities of successive SEC chairs and directors of its Division of Corporation Finance.

To help follow the different workstreams, we have been maintaining a chart we call the Disclosure Simplification Explainer, which maps them and provides live links to each of the underlying SEC releases.

  • Item 101(c) calls for a description of the business, with a list of specific matters to be addressed to the extent they are material to the business as a whole.
    • The new rule revises and condenses the list, and it emphasizes that only material matters need to be addressed.
    • The new list adds two new items: human capital resources, as discussed further below, and effects of government regulation (where the prior rule only specifically identified environmental regulation). Most highly regulated companies already provide extensive disclosure about government regulation, but others may need to expand their disclosure beyond environmental regulation.

Footnotes

1 Release No. 33-10825 (Aug. 26, 2020), available here.

2 Release No. 33-10668 (Aug. 8, 2019), available here.

3 Release No. 33-10064 (Apr. 13, 2016), available here.

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