Risk & Compliance

SEC Aims to Ease Disclosure Rules

The commission proposes a more principles-based, less-prescriptive approach to business description and risk factor disclosures.
David McCannAugust 9, 2019

The Securities and Exchange Commission on Thursday proposed revisions to disclosure rules that would ease the compliance burden for publicly held companies.

The amendments would relax the prescriptive nature of Regulation S-K items 101 (description of the business) and 105 (risk factors). The changes are aimed at making the disclosures more readable and excluding non-material and repetitive information.

The proposal calls for “a more principles-based approach because businesses differ in terms of which aspects of these disclosures are material to them,” the SEC said. “Such a flexible approach, as opposed to prescriptive requirements, may elicit more relevant disclosures about these items.”

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Item 101 would be revised to specify that registrants need to disclose only information that is material to an understanding of the general development of a registrant’s business.

Also, the SEC proposed, after a registrant’s initial filing it would be required to provide only an update of the general development of the business focusing on material developments in the latest reporting period.

Further, the commission proposed, without elaborating, to “eliminate a prescribed timeframe for making this disclosure.”

The proposal would, however, add a new disclosure topic in item 101: human capital resources. To the extent the information would be relevant to an understanding of a registrant’s business, it would have to report on “any human capital measures or objectives that management focuses on in managing the business.”

That provision responds to increasing calls from investors, analysts, and other users of financial filings for mandated disclosure of such information.

By comparison, the proposed changes to the disclosure of risk factors are minor. Rather than the current standard of reporting the “most significant” factors, companies would be required to report “material” factors. If a filing’s risk factors section exceeded 15 pages, the registrant would have to provide a summary disclosure.

The SEC also proposed revisions to Regulation S-K item 103 (legal proceedings). The changes would not make this requirement less prescriptive, but companies still would get a break.

Most notably, the current $100,000 threshold for the disclosure of government environmental proceedings would be raised to $300,000 in order, according to the SEC, “to adjust for inflation.”

“The world economy and our markets have changed dramatically in the more than 30 years since the adoption of our rules for business disclosures by public companies,” said SEC chair Jay Clayton. “[The] proposal reflects these significant changes, as well as the reality that there will be changes in the future.”

The proposal will have a 60-day public comment period.