WSGR ALERT

SEC Proposes Amendments to Further Modernize Regulation S-K Disclosure Requirements

August 19, 2019

On August 8, 2019, the U.S. Securities and Exchange Commission (SEC) proposed amendments to the requirements related to the description of business, legal proceedings, and risk factors in SEC filings. These amendments are part of the SEC's ongoing efforts to modernize its disclosure requirements.

The SEC stated that these "proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material."1

A more detailed description of the proposed amendments can be found below. The SEC is accepting public comments on the proposed rules within 60 days of their publication in the Federal Register, which can be submitted here.

For more information and/or if you would like to provide feedback for a comment letter that the firm intends to submit to the SEC, please reach out to your Wilson Sonsini Goodrich & Rosati contact.

What Are the Proposed Amendments?

The amendments proposed for Items 101 and 105 of Regulation S-K provide for a principles-based approach. In other words, given the variability across industries, geographies, and otherwise in the development of businesses and the risks associated with businesses, the SEC opted for amendments that provide the flexibility for a company to tailor its disclosures to the company's specific characteristics and circumstances. Conversely, the amendments proposed for Item 103 do not depend on the unique circumstances of a company; therefore, the SEC retained a prescriptive approach to this disclosure requirement.

The SEC acknowledged that a principles-based approach requires reliance on companies to make determinations on materiality and disclosures, potentially resulting in management teams misjudging what is or is not material. However, the SEC believes these risks will be offset by the commission's Division of Corporation Finance's disclosure reviews, accounting controls, and the antifraud provisions of the securities laws.

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

  • Prescribed timeframe. The proposed amendment deletes the prescribed five-year, or three-year for smaller-reporting companies, timeframe for disclosure. The SEC emphasized that the focus of the disclosure should be on information that is material to an understanding of the registrant's business, and that this may result in some registrants disclosing more than five years and other registrants disclosing less than five years of the development of the business, depending on what timeframe is material to an understanding of the particular registrant's business.
  • Non-exhaustive list of disclosures; mode of conducting business. The proposed amendment maintains (with some changes) the non-exhaustive list of disclosures to be made in the course of describing the general development of the registrant's business. However, whereas under the current rule this information is required irrespective of materiality, under the proposed amendment, this non-exhaustive list of disclosures is only required if the information is material to an understanding of the general development of the registrant's business. In addition, the proposed amendment deletes the explicit line item for material changes to the mode of conducting business.
  • Business strategy. In addition to the changes described in the immediately preceding bullet, the proposed amendment adds an explicit line item for any material changes to the previously disclosed business strategy of the registrant. Citing concerns from some commenters about the potential proprietary nature of business strategies and the possible competitive harm that could result if a registrant's business strategy is required to be disclosed, the SEC did not add a requirement to disclose a registrant's business strategy. Rather, if a registrant had already previously disclosed its business strategy in a public filing, has changed its business strategy, and such change in business strategy is material to an understanding of the registrant's business, then the registrant is required to disclose this change.
  • Disclosure of material developments; incorporation by reference and hyperlink of prior filing. For filings after the initial registration statement, the proposed amendment permits a registrant to limit its disclosure pursuant to Item 101(a) to material updates during the reporting period, as long as the registrant incorporates by reference and provides one hyperlink to the registrant's most recently filed disclosure document that, together with the material updates, provide a full discussion of the general development of the business. The SEC noted that the ability to incorporate Item 101(a) disclosure by reference is already permissible under Rule 411 of the Securities Act and Rule 12b-23 of the Exchange Act and, accordingly, this amendment is more of a clarification of the existing rule than an amendment. However, the concept of allowing only one hyperlink is new and was included in the proposed amendment in response to concerns from commenters about the potentially burdensome nature of having to piece together information from multiple hyperlinks.

Item 101(c), Description of Business.

  • Disclosure required. The proposed amendment maintains the distinction between the topics for which segment disclosure should be the focus and topics for which the overall business should be the focus. However, in either case, the proposed amendment clarifies that disclosure is only required if it is material to an understanding of the registrant's business taken as a whole.
  • Streamlining disclosure topics. The proposed amendment streamlines several of the listed disclosure topics, including removing quantitative measurements and combining related disclosure topics into single line items. For example, in the proposed amendment, existing Items 101(c)(1)(i), (ii), and (vii) relating to products, services, and customers have been combined into a single disclosure topic. This new combined disclosure topic has been simplified and all quantitative measurements have been deleted, including the requirement to list the name of any customer with sales equal to 10 percent or more of the registrant's consolidated revenues the loss of which would have a material adverse effect on the registrant and its subsidiaries taken as a whole. In addition, the proposed amendment creates a new disclosure topic called "resources that are material to a registrant's business" and embeds the raw materials and intellectual property disclosures as examples of disclosures that may be made under this new disclosure topic.
  • Deleting disclosure topics. The proposed amendment deletes the disclosure topic relating to working capital. The SEC is proposing this amendment primarily because working capital is already referenced in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Instruction 5 of Item 303). Moreover, the SEC noted that with the deletion of working capital from Item 101(c), it expects working capital matters to be discussed in the MD&A, to the extent material. Notably, the proposed amendment also deletes the backlog disclosure topic.
  • Addition of disclosure topics. The proposed amendment expands the disclosure topic relating to environmental regulations to include disclosure of the material effects of compliance with material government regulations, both foreign and domestic. The SEC noted that this new disclosure topic is consistent with existing practice of many registrants that are already disclosing the material effects of compliance with material government regulations. In addition, the SEC proposed deleting the requirement that a registrant disclose its number of employees and replacing it with a disclosure topic relating to human capital, including any measures or objectives that management focuses on in managing the business, e.g., measures or objectives that address the attraction, development, and retention of personnel.

Item 103, Legal Proceedings.

  • Incorporation by reference; hyperlinking. The proposed amendment allows a registrant to hyperlink or cross reference to other legal proceedings disclosures in the applicable filing, including to the notes to the financial statements and risk factors. The SEC confirmed that the disclosure requirements in Item 103 and U.S. Generally Accepted Accounting Principles (GAAP) (ASC 450-20 loss contingencies) differ in some respects but noted that given some of the overlapping requirements in Item 103 and U.S. GAAP, many registrants repeat these disclosures in Item 103. Therefore, the SEC is proposing this amendment in an effort to avoid this duplicative disclosure.
  • Threshold. The current quantitative threshold for disclosure of environmental claims is $100,000. Given that this threshold was originally adopted more than 30 years ago, the SEC has proposed an amendment increasing the threshold to $300,000 to adjust for inflation.

Item 105, Risk Factors.

  • Summary of risks. For filings with risk factor disclosure exceeding 15 pages, the SEC has proposed to require a summary risk factor disclosure in the forepart of the disclosure document, comprised of a series of short, concise, bulleted, or numbered statements summarizing the principal factors that make an investment in the registrant or the offering speculative or risky. The SEC believes that this may provide an incentive for registrants to limit their risk factor disclosure to 15 pages or less. Of note, the SEC initially considered a page limit requirement for risk factor disclosure but did not include a page limit requirement in this amendment.
  • Disclosure standard. The proposed amendment modifies the disclosure standard for risk factors from "most significant" to "material." Here again, the SEC expressed a belief that this may serve to limit the length, as well as the generic nature of some, of the risk factors.
  • Relevant headings. The proposed amendment requires that the risk factors be organized under relevant headings, with generic risk factors disclosed at the end of the risk factor section under the caption "General Risk Factors."

For more information on the SEC's proposed amendments or any related matter, please contact any WSGR member of the firm's capital markets practice.

Michael Nordtvedt, Allison Spinner, Jose Macias, Lisa Stimmell, and Courtney Mathes contributed to the preparation of this Client Alert.


1 See, "Modernization of Regulation S-K Items 101, 103, and 105," SEC Release No. 33-10668 (Aug. 8, 2019), available at: https://www.sec.gov/rules/proposed/2019/33-10668.pdf.