On August 26, 2020, the Securities and Exchange Commission (SEC) adopted final rules to update Items 101 (Description of Business), 103 (Legal Proceedings), and 105 (Risk Factors) of Regulation S-K, marking the first significant changes to these rules in over 30 years.1 As noted in our client alert on the proposed rules, these rules continue the SEC’s initiative to modernize and simplify disclosure requirements to reduce the disclosure of duplicative or immaterial information, enhance the quality of information provided to investors, and improve the efficiency of a company’s compliance efforts. 

Highlights of the final rules are summarized below.

Item 101 – Description of Business

The final rules amend Item 101(a) (General Development of Business) by:

• Replacing the current prescribed five-year timeframe with a materiality framework, requiring disclosure of information material to an understanding of the general development of the company’s business.

• Allowing a company, after its disclosure in an initial registration statement or report, to simply provide an update on material developments that have occurred since that full discussion, which will be incorporated by reference, in a subsequent report.

  • To the extent a company had previously disclosed a business strategy, the company should disclose associated changes material to an understanding of the development of the company’s business.

The final rules amend Item 101(c) (Description of Business) by:

• Replacing the current list of specific items contained in Item 101(c) with a principles-based, non-exclusive list of disclosure topic examples drawn in part from topics currently addressed in Item 101(c).

  • Disclosure about new segments, dollar amount of backlog orders believed to be firm and working capital practices will no longer be listed in Item 101(c).

• Including as a new topic, to the extent material to an understanding of the company’s business taken as a whole, a description of the company’s human capital resources, including any human capital measures or objectives that the company focuses on in managing its business.

  • Many institutional investors have made human capital an engagement priority or have otherwise added significance to this aspect of their investment philosophy in recent years, and this change represents the SEC’s response to incorporate this concept in the disclosure framework.

  • The rule lists as examples, depending on the nature of the company’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel.  

• Including as a new topic, to the extent material to an understanding of the company’s business taken as a whole, disclosure of the material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings, and competitive position of the company and its subsidiaries. 

  • This change shifts the disclosure focus from environmental regulations to government regulations more broadly.

Item 103 – Legal Proceedings

The final rules amend Item 103 by:

• Clarifying that a company may provide the required information by hyperlink or cross-reference to legal proceedings disclosure elsewhere in the document, such as in MD&A, Risk Factors, or a note to the financial statements.

• Increasing the disclosure threshold of potential monetary sanctions in certain environmental proceedings to which a governmental authority is a party from $100,000 to $300,000.

• Allowing a company to elect a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings.

  • Irrespective of any alternative threshold adopted by the company, disclosure will be required in all cases for any proceeding when the potential monetary sanctions exceed the lesser of $1 million or one percent of the current assets of the company and its subsidiaries on a consolidated basis. 

  • If a company elects a different threshold, it must disclose the threshold (including any change thereto) in each annual and quarterly report.

Item 105 – Risk Factors

The final rules amend Item 105 by:

• Requiring, if the risk factor section exceeds 15 pages, a series of concise, bulleted or numbered statements of no more than two pages in the forepart of the filing summarizing the principal risk factors.

• Focusing on disclosure of the “material” factors to which reasonable investors would attach importance in making investment or voting decisions, rather than the “most significant” factors.

• Requiring that to the extent generic risk factors are presented, they should be disclosed at the end of the section under the caption “General Risk Factors.” 

What’s Next?

The amendments will be effective 30 days after publication in the Federal Register, and are expected to be effective in time to apply to annual reports of calendar year-end companies. Companies should review the final rules and consider the impact on their disclosure in annual and quarterly reports, and, as applicable, registration statements. With respect to disclosure on human capital, companies should review voting guidelines of their key institutional investors and emerging industry trends to inform their disclosure approach.