On August 26, 2020, the US Securities and Exchange Commission (SEC) adopted amendments to Regulation S-K that are intended to modernize business, legal proceedings and risk factor disclosures.1 According to the SEC, the amendments are designed to update rules, to improve the readability of disclosures and to simplify compliance for reporting companies. These amendments become effective 30 days after the adopting release is published in the Federal Register.
The amendments, initially proposed in August 2019,2 represent one of a series of steps that the SEC has taken to update and modernize the disclosure requirements in Regulation S-K. For example, in 2016, as part of the SEC's disclosure effectiveness initiative, the SEC issued a concept release requesting comment on many aspects of the business and financial disclosures required by Regulation S-K.3 Thereafter, in August 2018, the SEC adopted disclosure update and simplification amendments, primarily relating to management's discussion and analysis of financial condition and results of operations (MD&A) and financial statement disclosures that became effective in November 2018.4 In March 2019, the SEC adopted modernization and simplification amendments, primarily focusing on other provisions of Regulation S-K, which became effective in May 2019.5 The SEC proposed amendments to the MD&A provisions, selected financial data and supplementary financial information in January 2020.6 And in May 2020, the SEC amended the requirements for financial disclosures for acquired and disposed businesses.7 In short, the impetus for the current modernization amendments has been years in the making.
The amendments to Item 101(a) of Regulation S-K (General development of business) and Item 101(c) of Regulation S-K (Description of business) reflect a move away from prescriptive, line-item disclosure requirements to principles-based disclosure requirements that rely on a company's management to evaluate the significance of information in the context of the company's overall business and financial circumstances in order to determine whether disclosure is necessary. This approach permits companies to move from a one-size-fits-all disclosure regime to one that allows for tailored disclosures that better fit their industry and their specific facts and circumstances.
General development of business. Previously, Item 101(a) required a description "of the general development of the business of the registrant, its subsidiaries and any predecessor(s) during the past five years" and "for earlier periods if material to an understanding of the general development of the business." The amendments to Item 101(a) require disclosure of the general development of the business only to the extent the information is "material to an understanding of the general development of the business." As amended, the rule provides a non-exclusive list of four topics that should be considered for inclusion in this discussion but makes clear that if there are other matters material to an understanding of the general development of company's business, the company will be required to disclose them.
Three of the enumerated topics are modified versions of existing requirements (material bankruptcies of the company or any of its significant subsidiaries; material reclassifications, mergers or consolidations; and material acquisitions and dispositions). A new topic for consideration for disclosure is any material changes to a previously disclosed business strategy. Although material changes to a disclosed strategy are potentially reportable, strategy disclosure itself is not mandatory.
The SEC has eliminated the prescribed five-year timeframe for disclosure, requiring companies to focus on information that is material to understanding the development of their business without regard to a specific timeframe. A company may forgo providing a full discussion of the general development of its business for a filing, other than an initial registration statement, if it provides an update regarding its business, disclosing all of the material developments that have occurred since the most recent registration statement or report that includes a full discussion of the business. In order to do so, however, the company must incorporate by reference and include one active hyperlink to a single, previously filed registration statement or report that includes the full discussion. If the company does not choose this approach, it must provide a complete discussion, including any material updates in each filing that requires such disclosure.
Description of business. Previously, Item101(c) required a description of "the business done and intended to be done by the registrant and its subsidiaries, focusing upon the registrant's dominant segment or each reportable segment about which financial information is presented in the financial statements" and identified specific topics that were required to be disclosed. The SEC has made principles-based revisions to Item 101(c). Item 101(c) was amended to contain a non-exclusive list of disclosure topics, including some from current Item 101(c), to be discussed in the context of the description of a company's business. These topics are not prescriptive line-item requirements but are only required to be addressed to the extent material to an understanding of a company's business.
The amendments to Item 101(c) also enumerate a new topic for consideration for disclosure: a description of human capital resources. If required to be addressed, a human capital resources discussion would need to include, to the extent material to an understanding of a company's business, the number of persons employed by the company and any human capital measures or objectives that the company focuses on in managing the business, such as measures or objectives that address the development, attraction and retention of personnel. According to the adopting release, the SEC believes "that, in many cases, human capital disclosure is important information for investors" and that "[h]uman capital is a material resource for many companies and often is a focus of management, in varying ways, and an important driver of performance."
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1 Available at https://www.sec.gov/rules/final/2020/33-10825.pdf
2 Available at https://www.sec.gov/rules/proposed/2019/33-10668.pdf
3 Available at https://www.sec.gov/rules/concept/2016/33-10064.pdf For further information, see our Legal Update "Modernization of US Business and Financial Disclosures: A 'Taste' of the SEC's Concept Release," dated April 26, 2016, available at https://www.mayerbrown.com/en/perspectives-events/publications/2016/04/modernization-of-us-business-and-financial-disclos
4 For further information, see our Legal Update "Capital Markets Implications of Amendments to Simplify and Update SEC Disclosure Rules," dated August 29, 2018, available at https://www.mayerbrown.com/-/media/files/perspectivesevents/publications/2018/08/capital-markets-implications-of-amendments-tosimp/files/updatecapitalmarketsimplicationsofamendmentstosimp/fileattachment/updatecapitalmark etsimplicationsofamendmentst osimp.pdf and our Legal Update "Form 10-Q Guidance on SEC's Disclosure Update and Simplification Amendments," dated September 27, 2018, available at https://www.mayerbrown.com/en/perspectives-events/publications/2018/09/form-10q-guidanceon-secs-disclosure-update-and-si
5 For further information, see our Legal Update "SEC Adopts Rules to Modernize and Simplify Disclosure," dated March 27, 2019, available at https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/03/skmodernizationadopted.pdf and our Legal Update "Follow-Up on Regulation S-K Modernization and Simplification," dated April 3, 2019, available at https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/04/legal-update-follow-up-on-skmodernization-and-simplification.pdf
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