Modernization of Regulation S-K

We are proposing amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosure requirements in Regulation S-K. We are proposing amendments to these items to improve these disclosures for investors and to simplify compliance for registrants. [1]

Pursuant to Section 108 of the Jumpstart Our Business Startups Act (“JOBS Act”), [2] the Commission staff prepared the Report on Review of Disclosure Requirements in Regulation S-K (“S-K Study”), [3] which recommended that the Commission conduct a comprehensive evaluation of its disclosure requirements. Based on the S-K Study’s recommendation, the staff initiated an evaluation of the information our rules require registrants to disclose, how this information is presented, where this information is disclosed, and how we can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”). [4] The overall objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for both investors and registrants.

In connection with the S-K Study and the launch of the Disclosure Effectiveness Initiative, the Commission staff received public input on how to improve registrant disclosures. [5] In a separate Concept Release issued in 2016, [6] the Commission staff revisited the business and financial disclosure requirements in Regulation S-K and requested public comment on whether they provide the information that investors need to make informed investment and voting decisions, and whether any of our rules have become outdated or unnecessary.

In developing the proposed amendments, we considered input from comment letters we received in response to these disclosure modernization efforts. [7] We also took into account the staff’s experience with Regulation S-K arising from the Division of Corporation Finance’s disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K.

Regulation S-K was adopted in 1977 to foster uniform and integrated disclosure for registration statements under both the Securities Act and the Exchange Act, and other Exchange Act filings, including periodic and current reports. [8] In 1982, the Commission expanded and

reorganized Regulation S-K to be the central repository for its non-financial statement disclosure requirements. [9] The Commission’s goals in adopting integrated disclosure were to revise or eliminate overlapping or unnecessary disclosure requirements wherever possible, thereby reducing burdens on registrants and enhancing readability without affecting the provision of information material to an investment decision. [10]

The Commission adopted line-item requirements in Regulation S-K to elicit specific disclosure within broad categories of information material to an investment decision. Some of these requirements provide registrants with the flexibility to determine the disclosure that is material to an investment decision. [11] These disclosure requirements are often referred to as “principles-based” because they articulate a disclosure concept rather than a specific line-item requirement. [12] Principles-based rules rely on a registrant’s management to evaluate the significance of information in the context of the registrant’s overall business and financial circumstances and to determine whether disclosure is necessary. [13] As the Commission stated in the Concept Release, emphasizing principles-based disclosure may allow a registrant to more effectively tailor its disclosure to provide the information about its specific business and financial condition that is material to an investment decision and in turn may reduce the amount of disclosure that may be irrelevant, outdated or immaterial. [14]

In contrast, some line-item requirements in Regulation S-K employ bright-line, quantitative thresholds to specify when disclosure is required, or require all registrants to disclose the same type of information. These requirements are sometimes referred to as “prescriptive” disclosure requirements because they do not rely on management’s judgment to determine when disclosure is required. The benefits of prescriptive disclosure requirements can include comparability, consistency, and ease in determining when information must be disclosed. [15]

The Concept Release sought input on whether our disclosure requirements should be more principles-based, prescriptive, or a combination of both. Many commenters supported a more principles-based approach [16] while other commenters supported some combination of both principles-based and prescriptive rules. [17]

We are proposing amendments to Items 101, 103, and 105 [18] in light of the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since their adoption, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, which may affect the relevance of current disclosure requirements, changes in technology (in particular the availability of information), and changes such as inflation that have occurred simply with the passage of time. [19] For example, Item 101 mandates certain disclosures that may be outdated while Item 103 includes a dollar threshold for proceedings related to environmental protection laws that was set in 1982. [20] Further, numerous commenters cited the risk factor disclosure requirements as needing improvement. [21] We believe that modernizing these disclosure items would result in improved disclosure, tailored to reflect registrants’ particular circumstances, and reduce disclosure costs and burdens.

For each of the disclosure requirements addressed in this release, we considered the merits and drawbacks of pursuing a principles-based versus prescriptive approach. We also considered each requirement as a component of a broader framework that will achieve the disclosure objectives of the Securities Act and the Exchange Act in the most effective and efficient manner. As discussed in greater detail in Section II below, we propose to revise Items 101(a) (description of the general development of the business), 101(c) (narrative description of the business), and 105 (risk factors) to emphasize a principles-based approach because the current disclosure requirements may not reflect what is material to every business, and, as past developments have demonstrated, disclosure requirements, and in particular prescriptive disclosure requirements, can become outdated in these areas. We believe this approach would elicit more relevant disclosures about these items. In contrast, we are proposing a more prescriptive approach for Item 103 because that requirement depends less on the specific characteristics of individual registrants.

Our proposed amendments would: [22]

• Revise Item 101(a) to be largely principles-based, requiring:
  • Disclosure of information material [23] 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.
• 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);
  • 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 regulations, not just environmental laws, as a topic.
• 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.
• 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. [24]

We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

The complete publication, including footnotes, is available here.

Endnotes

1The proposed amendments are also consistent with and further promote the objectives of the Fixing America’s Surface Transportation Act (“FAST Act”). See Pub. L. No. 114-94, 129 Stat. 1312 (Dec. 4, 2015) (requiring, among other things, that the SEC conduct a study, issue a report and issue a proposed rule on the modernization and simplification of Regulation S-K). In the Report on Modernization and Simplification of Regulation S-K, the staff recommended that the Commission consider combining the description of material physical properties required in Item 102 with the description of business in Item 101(c). See Report on Modernization and Simplification of Regulation S-K (Nov. 23, 2016), available at https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf. The Commission considered the staff recommendation, but did not propose to combine Item 102 with Item 101. See FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10425 ((Oct. 11, 2017) [82 FR 50988 (Nov. 2, 2017)]. Instead, the Commission adopted amendments to Item 102 to emphasize the materiality standard applicable to that disclosure, while preserving the industry-specific instructions to that Item. See FAST Act Modernization and Simplification of Regulation S-K, Release No. 33- 10618 (Mar. 20, 2019) [84 FR 12674 (April 2, 2019 )] (“FAST Act Adopting Release”). We believe that, in light of our proposed amendments to Item 101, combining the two items would not improve registrants’ business disclosure or simplify compliance.(go back)

2Pub. L. No. 112-106, Sec. 108, 126 Stat. 306 (2012). Section 108 of the JOBS Act required the Commission to conduct a review of Regulation S-K to determine how such requirements can be updated to modernize and simplify the registration process for emerging growth companies.(go back)

3See Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013), available at https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf (“S-K Study”).(go back)

4See SEC Spotlight on Disclosure Effectiveness, available at https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.(go back)

5In connection with the S-K Study, we received public comments on regulatory initiatives to be undertaken in response to the JOBS Act. See Comments on SEC Regulatory Initiatives Under the JOBS Act: Title I—Review of Regulation S-K, available at http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml. To facilitate public input on the Disclosure Effectiveness Initiative, members of the public were invited to submit comments. See Request for Public Comment, available at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml. Public comments received to date on the topic of Disclosure Effectiveness are available on our website. See Comments on Disclosure Effectiveness, available at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml. We refer to these letters throughout as “Disclosure Effectiveness” letters.(go back)

6 See Business and Financial Disclosure Required by Regulation S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 2016)] (“Concept Release”).(go back)

7 Unless otherwise indicated, comments cited in this release are to the public comments on the Concept Release, supra note 6, which are available at https://www.sec.gov/comments/s7-06-16/s70616.htm.(go back)

8The Commission adopted the initial version of Regulation S-K following issuance of the report by the Advisory Committee on Corporate Disclosure led by former Commissioner A. A. Sommer, Jr., which recommended adoption of a single integrated disclosure system. See Report of the Advisory Committee on Corporate(go back)

Disclosure to the Securities and Exchange Commission, Cmte. Print 95-29, House Cmte. On Interstate and Foreign Commerce, 95th Cong., 1st. Sess (Nov. 3, 1977) (“Report of the Advisory Committee”), available at http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1970/1977_1103_AdvisoryDisclosure.pdf. This version of Regulation S-K included only two disclosure requirements—a description of business and a description of properties. See Concept Release, supra note 6, and accompanying text.

9See Adoption of Integrated Disclosure System, Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (“1982 Integrated Disclosure Adopting Release”).(go back)

10 See id.(go back)

11 On several occasions, the Commission has reiterated that its requirements seek disclosure of information material to an investment decision. See, e.g., Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 8, 2010) [75 FR 6290 (Feb. 8, 2010)] (“Climate Change Release”) at 6292- 6293 (reiterating that information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or, put another way, if the information would alter the total mix of available information); Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies, Investment Advisers, Investment Companies, and Municipal Securities Issuers, Release No. 33-7558 (July 29, 1998) [63 FR 41394 (Aug. 4, 1998)] at 41395 (stating that our disclosure framework requires companies to disclose material information that enables investors to make informed investment decisions).(go back)

12See Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53157 (Sept. 8, 2006)] (“As described in the Proposing Release and as adopted, the Compensation Discussion and Analysis requirement is principles-based, in that it identifies the disclosure concept and provides several illustrative examples.”).(go back)

13See Report of the Advisory Committee, supra note 8 (“Although the initial materiality determination is management’s, this judgment is, of course, subject to challenge or question by the Commission or in the courts.”).(go back)

14 See Concept Release, supra note 6.(go back)

15See id. For a discussion of the potential economic effects of switching from a prescriptive to a more principles- based disclosure requirement, including a potential loss of comparability, see infra Sections IV.B.1 and 2 and IV.D.(go back)

16See letters from R.G. Associates, Inc. (July 6, 2016) (“RGA”), American Bankers Association (July 15, 2016), Deloitte & Touche LLP (July 15, 2016) (“Deloitte”), New York State Society of Certified Public Accountants (July 19, 2016) (“NYSSCPA”), U.S. Chamber of Commerce (July 20, 2016) (“Chamber”), BDO USA LLP (July 20, 2016) (“BDO”), Corporate Governance Coalition for Investor Value (July 20, 2016) (“CGCIV”), International Integrated Reporting Council (July 20, 2016) (“IIRC”), Railpen Investments (July 21, 2016) (“Railpen”), National Association of Manufacturers (July 21, 2016) (“NAM”), American Chemistry Council(go back)

(July 19, 2016) (“ACC”), The American Petroleum Institute (July 21, 2018) (“API”), Business Roundtable (July 21, 2016), UnitedHealth Group, Inc. (July 21, 2016) (“United Health”), Center for Audit Quality (July 21, 2016) (“CAQ”), Securities Industry and Financial Markets Association (July 21, 2016) (“SIFMA”), Ernst & Young LLP (July 21, 2016) (“E&Y”), PNC Financial Services Group (July 21, 2016) (“PNC”), Edison Electric Institute and American Gas Association (July 21, 2016) (“EEI and AGA”), Grant Thornton LLP (July 21, 2016) (“Grant”), KPMG LLP (July 21, 2016) (“KPMG”), PricewaterhouseCoopers LLP (July 21, 2016) (“PWC”), Cornerstone Capital Inc. (July 21, 2016) (“Cornerstone”), Crowe Horwath LLP (July 21, 2016) (“Crowe”), America Gas Association (July 21, 2016) (“AGA”), Prologis, Inc. (July 21, 2016) (“Prologis”), National Association of Real Estate Investment Trusts (July 21, 2016) (“NAREIT”), Allstate Insurance Company (July 21, 2016) (“Allstate”), Davis Polk & Wardwell LLP (July 22, 2016) (“Davis”), Chevron Corporation (July 22, 2016) (“Chevron”), Fenwick West LLP (Aug. 1, 2016) (“Fenwick”), Reardon Firm (Aug. 3, 2016) (“Reardon”), National Investor Relations Institute (Aug. 4, 2016) (“NIRI”), Sullivan & Cromwell LLP (Aug. 9, 2016), Exxon Mobil Corporation (Aug. 9, 2016), FedEx Corporation (July 21, 2016) (“FedEx”), Institute of Management Accountants (July 29, 2016), Shearman & Sterling LLP (Aug. 31, 2016) (“Shearman”), Nasdaq, Inc. (Sept. 16, 2016) (“Nasdaq”), Northrop Grumman Corporation (Sept. 27, 2016), General Motors Company (Sept. 30, 2016) (“General Motors”) and Financial Executives International (Oct. 3, 2016) (“Financial Executives International”).

17See letters from Council of Institutional Investors (July 8, 2016) (“CII”), Railpen, New York State Comptroller (July 21, 2016) (“NYSC”), California State Teachers’ Retirement System (July 21, 2016) (“CalSTRS”), Pension Investment Association of Canada (July 17, 2016), Medical Benefits Trust (July 15, 2016) (“Medical Benefits Trust”), Principles for Responsible Investment (July 19, 2016) (“PRI”), Legal & General Investment Management (July 20, 2016) (“LGIM”), Walden Asset Management (July 19, 2016) (“Walden”), SEC Investor Advisory Committee (June 15, 2016) (“IAC”), AFLAC (July 19, 2016) (“AFLAC”), Domini Social Investments LLC (July 21, 2016) (“Domini Social”), NYC Comptroller (July 21, 2016) (“NYC Comptroller”), AFL-CIO (July 21, 2016) (“AFL-CIO”), California Public Employees’ Retirement System (July 21, 2016) (“CalPERS”), British Columbia Investment Management Corporation (July 21, 2016), Stephen Percoco (July 24, 2016) (“S. Percoco”), Americans for Financial Reform (Aug. 10, 2016) (“Americans for Financial Reform”) and CFA Institute (Oct. 6, 2016) (“CFA Institute”). Four commenters supported a combination that emphasized a principles-based approach (Walden, AFLAC, Ball Corporation (July 19, 2016) (“Ball Corporation”) and S. Percoco) and seven commenters supported a combination that emphasized a prescriptive approach (IAC, NYC Comptroller, American Federation of State, County and Municipal Employees (July 21, 2016) (“AFSCME”), Maryland State Bar Association (July 21, 2016) (“Maryland Bar Securities Committee”), AFL-CIO, Americans for Financial Reform and CFA Institute).(go back)

18The Commission recently rescinded Item 503(c) of Regulation S-K and replaced it with new Item 105 of Regulation S-K. See FAST Act Adopting Release, supra note 1.(go back)

19See infra note 279 (noting that while Items 101, 103, and 105 have not undergone significant revisions in over 30 years, many characteristics of the registrants have changed substantially over this time period).(go back)

20 See id.(go back)

21See, e.g., letters from CAQ, AFLAC, Chamber, FedEx, CGCIV, NAM, ACC, SIFMA, E&Y, EEI and AGA, Wilson Sonsini Goodrich & Rosati (July 21, 2016) (“Wilson Sonsini”), NAREIT, Davis, Fenwick, NIRI, Shearman, PWC, General Motors, and Financial Executives International.(go back)

22We are also proposing amendments to Item 101(h) of Regulation S-K [17 CFR 229.101(h)], which permits a smaller reporting company to fulfill its disclosure obligations under Item 101, including with respect to its business development, by providing the disclosure specified under that paragraph. “Smaller reporting company” is defined in 17 CFR 229.10(f) as an issuer that is not an investment company, an asset-backed issuer (as defined in 17 CFR 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (i) had a public float of less than $250 million; or (ii) had annual revenues of less than $100 million and either: (A) no public float; or (B) a public float of less than $700 million. Business development companies, which are a type of investment company, are not eligible to be smaller reporting companies. See, e.g., Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33-8819 ((July 5, 2007) [72 FR 39670 (July 19, 2007)], at 39674.(go back)

23Information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision. See supra note 14 and accompanying text.(go back)

24The proposed amendments to Items 101 and 103 will affect only domestic registrants and “foreign private issuers” that have elected to file on domestic forms. This is because Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (such as Securities Act Form F-1, F-3, or F-4) specifically refers to Regulation S-K. Instead of Items 101 and 103, the foreign private issuer forms refer to Part I of Form 20-F. See, e.g., Item 4.a. of Form F-1. In contrast, the proposed amendment to Item 105 will affect both domestic and foreign registrants because Forms F-1, F-3, and F-4, like their domestic counterparts, all refer to that Item. See, e.g., Item 3 of Form F-1. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50% of its outstanding voting securities held of record by U.S. residents; and (2) any of the following: (i) a majority of its officers and directors are citizens or residents of the United States; (ii) more than 50% of its assets are located in the United States; or (iii) its business is principally administered in the United States. 17 CFR 230.405. See also 17 CFR 240.3b-4(c).(go back)