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Legal Alert

SEC Amends Disclosure Requirements for Business and Risk Descriptions

September 1, 2020

On August 26, 2020, the Securities and Exchange Commission adopted amendments to Regulation S‑K to modernize some of the standard disclosures that appear in public company reports, such as the annual report on Form 10-K and prospectuses for public offerings. The amendments to Items 101, 103, and 105 affect the description of the company's business, legal proceedings, and risk factor disclosures.

This is the first significant change in these disclosure requirements in over 30 years. The SEC stated in its press release that these amendments "update these items to reflect the many changes in our capital markets and the domestic and global economy in recent decades." The amendments will be effective 30 days after publication in the Federal Register, with likely effectiveness in October 2020.

Disclosure Amendments

The amended disclosure rules are contained in the SEC's adopting release on pages 123-129. The amendments, described in the SEC's press release, include the following important changes:

Business Disclosures. Under the amended rules, the description of the development of the business is more principles-based, focusing on disclosure of "information material to an understanding of the general development of the business." The previous specific requirements, including a specific historical time frame (five years for larger companies), are eliminated. However, material changes in a previously announced business strategy must be addressed. After the registrant's initial filing, the disclosure can incorporate a previously filed business description by reference, including a hyperlink, and can provide an update from this information.

Specific Business Topics. The amended rule changes the non-exclusive list of business disclosure topics in Item 101(c). Some of the previous specific disclosures, such as the company's year of organization, backlog orders, and working capital practices, have been deleted. The discussion of compliance with material government regulations has been broadened beyond environmental laws. The amended rule also requires a discussion of human capital resources, to the extent material to an understanding of the business, including any human capital measures or objectives that the registrant focuses on in managing its business. As discussed below, this human capital disclosure was a controversial topic that elicited numerous public comments and dissents from two commissioners.

Little Change for Smaller Reporting Companies. The business disclosure requirements for smaller reporting companies in Item 101(h) were already more general and principles-based than for other companies. In the amendments, the SEC elected to make only two changes to these requirements: (1) the three-year historical time frame is eliminated; and (2) after the registrant's initial filing, the disclosure can incorporate a previously filed business description by reference, including a hyperlink, and can provide an update from this information.

Legal Proceedings. The amendments allow the registrant to provide the required information by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure—many companies currently repeat the same disclosures in this section and the notes to financial statements. The amended rule also implements a modified disclosure threshold for certain governmental proceedings resulting in monetary sanctions.

Risk Factors. The amended rule requires risk factors to be organized under relevant headings, in addition to the existing requirement that each risk factor be set forth under a descriptive subcaption. Any risk factors that may generally apply to an investment in securities should be disclosed at the end of the risk factor section under a separate heading for "General Risk Factors." If the risk factors section is longer than 15 pages, a summary risk factor disclosure of up to two pages is required in the first part of the disclosure document.

Controversy Over Human Capital and ESG Disclosures

The amendments were adopted by a 3-2 vote of the Commissioners, as is often the case these days. The dissenters expressed disapproval of the "generic and vague" principles-based disclosure with respect to human capital and regulatory matters, rather than requiring specific information and metrics. The dissents reflected the opinions in many of the public comments to the proposed rules, pushing for more specific disclosures about human capital management, climate change risk, and other environmental, social, and governance (ESG) metrics.

For years, many commentators have been advocating for specific reporting of employment practices and diversity measures, among other things. For a good discussion of the controversy and the global trend toward reporting these measures, see "Human Capital's Big Reveal" by David McCann on CFO.com.

Consider Enhanced Human Capital Reporting

Even though the new rules do not endorse any specific current human capital reporting metrics, the SEC stressed the need for companies to disclose measures and objectives that are important to understanding a company's industry and workforce, which could include measures of part-time vs. full-time employees, independent contractors, and turnover. Companies should focus on enhancing these human capital disclosures, which will continue to be a focus of investors and regulators going forward.

We Can Help

If you have any related questions or need help navigating public company reporting requirements for your business, please contact Maslon's Corporate & Securities Group. We are ready to help you with these changes.

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