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SEC Proposes to Amend Disclosure Rules Regarding Business Description, Legal Proceedings, and Risk Factors

On August 8, 2019, the Securities and Exchange Commission (SEC) proposed amendments to the business description, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. As part of the SEC’s ongoing “Disclosure Effectiveness Initiative,” the proposed amendments are designed to improve the readability of disclosure documents, as well as to discourage disclosure of immaterial or repetitive information. These rules have not been significantly revised in more than 30 years, and the SEC intends for the proposed amendments to modernize the disclosure requirements, improve disclosures for investors, and simplify compliance efforts for registrants.

The proposed changes to the business description and risk factors disclosure rules emphasize a “principles-based approach,” providing registrants with the flexibility to determine what disclosure is material, and thereby reducing disclosures that may be irrelevant, outdated, or otherwise immaterial. In contrast, the SEC is retaining a more “prescriptive approach” to the rules governing disclosure of legal proceedings, employing bright-line or quantitative thresholds to specify when disclosure is required, which can promote comparability and consistency among registrants and ease in determining what information is required to be disclosed. A summary of the proposed amendments follows.

General development of business. 

Item 101(a) of Regulation S-K requires a registrant to describe the general development of its business during the past five years (and earlier periods if material). The current rule contains a list of items that are required to be addressed. The proposed amendments would:

  • state that only information material to an understanding of the general development of the registrant’s business is required to be disclosed, and include a non-exclusive list of suggested disclosure topics;

  • add, as a suggested disclosure topic, material changes to a previously disclosed business strategy;

  • eliminate the prescribed timeframe for this disclosure; and

  • in filings made after a registrant’s initial filing, permit a registrant to provide only an update that focuses on material developments in the reporting period, with an active hyperlink to the registrant’s most recent filing that, together with the update, would contain the full discussion of the general development of the registrant’s business.

Narrative description of business. 

Item 101(c) of Regulation S-K requires a registrant to describe the business done and intended to be done by the registrant. The proposed amendments would:

  • clarify and expand the rule to require disclosure of information only to the extent material to an understanding of the business taken as a whole;

  • add, as a suggested disclosure topic, a description of the registrant’s human capital resources, including any human capital measures or objectives that management focuses on in managing the business (such as measures or objectives that address the attraction, development, and retention of personnel); and

  • add all material government regulations, not just environmental provisions, as a suggested topic.

The proposed amendments would delete references in the current rule to the following topics: (i) disclosure regarding revenue contributed by any class of similar products or services that accounted for a specified percentage of consolidated revenue; (ii) working capital practices; (iii) names of customers or competitors; and (iv) backlog.

Legal proceedings. 

Item 103 of Regulation S-K requires specified disclosure regarding legal proceedings. The proposed amendments would:

  • expressly state that the required information may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document; and

  • increase the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000.

Risk factors. 

Item 105 of Regulation S-K requires disclosure regarding factors that make an investment in the registrant or offering subject to risk. The proposed amendments would:

  • if the risk factors section exceeds 15 pages, require a summary consisting of a series of concise bulleted or numbered statements;

  • require risk factors to be organized under relevant headings;

  • discourage generic risk factors and, if presented, require them to be located at the end of the risk factors section under the heading “General Risk Factors”; and

  • refine the principles-based approach of the rule by changing the disclosure standard from the “most significant” factors to the “material” factors.

The SEC will have a 60-day public comment period on the proposal following its publication in the Federal Register.

© 2020 Jones Walker LLPNational Law Review, Volume IX, Number 234


About this Author

Dionne M. Rousseau, Jones Walker, acquisitions transactions lawyer, public private companies attorney

Dionne Rousseau has served as the lead outside corporate and securities counsel for 12 public companies, and as boardroom lawyer for three of those companies. She has more than 25 years of experience handling corporate finance and mergers and acquisitions transactions for public and private companies. Representative transactions handled as lead counsel include two $1-billion at-the-market common stock offerings for a Fortune 500® Company; a $1-billion debt refinancing, including $300 million in senior subordinated notes and a $200-million debt tender offer...

Nnaemeka K. Anyanwu Corporate Lawyer Jones Walker

Nnaemeka K. Anyanwu is an associate in the Corporate Practice Group.

Prior to joining Jones Walker, Nnaemeka served as a regulatory law clerk for the Financial Services Roundtable, an advocacy organization for the US financial services industry, and was an honors intern in the US Securities and Exchange Commission's Division of Investment Management. He also served as a judicial intern for the Honorable Robert R. Rigsby for the Superior Court of the District of Columbia.