The Ins and Outs of the New SEC S-K Modernization Rules

By Steve Soter

For the first time in 30 years, the Securities and Exchange Commission (SEC) has changed its public company disclosure rules, modernizing disclosures of business (Item 101), legal proceedings (Item 103), and risk factors (Item 105) under regulation S-K. The move is designed to reflect the commission’s desire to bring the rules in line with current capital markets and the global economy. 

"Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit information that will allow today's investors to make more informed investment decisions,” SEC Chairman Jay Clayton said in a press release. “I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value. I applaud the staff for their dedication and thoughtful approach to modernizing and improving these rules and adding efficiency and flexibility to our disclosure framework."

Meet the new rules

The changes to items 101, 103, and 105 have a number of practical implications for public businesses. They are designed to better reflect a business’s particular circumstances to improve disclosures for investors and add efficiencies to the compliance efforts of registrants. They also stand to improve the readability of disclosure documents, discouraging repetition and reducing the disclosure of information that is not material. Here are the highlights:

  • Changes in Item 101 include replacing the previously prescribed five-year timeframe with a materiality framework. The rule also now includes, as a disclosure topic, a description of the registrant's material human capital resources, including examples such as workforce diversity, workforce compensation, and workforce stability. 
  • Item 103 is being changed to, among other things, expressly state that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure. 
  • Lastly, Item 105 has been amended to require summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages and the principles-based approach of item 105 has been refined by requiring disclosure of "material" risk factors. 

New rules. Who dis?

So what does this all mean? These are amendments to rules that have stayed the same for most professionals' entire careers, so any adjustment could have a significant impact. By and large, the changes are designed to simplify and give businesses more freedom to decide what is relevant to them. As Chairman Clayton mentioned, these changes continue to move toward more principles-based approaches, which can give filers flexibility to focus on the disclosures that really matter.

The human capital disclosure changes also moved us closer to codifying “ESG-like” disclosures. These amendments by the SEC, along with the Sustainability Accounting Standards Board’s (SASB) recent announcement of a XBRL® taxonomy, suggest that this movement is well underway. And, with a new administration in the White House, we can likely expect the SEC to continue in this direction. 

The changes prove that the SEC maintains its focus on the problem of seemingly endless and immaterial risk factors, hopefully making it easier for readers to use that information with fewer line-item disclosure requirements. In loosening some restrictions, businesses are free to determine what is relevant in their particular circumstances regarding 10-Ks, 10-Qs, and registration statements. 

These rules became effective on Nov. 9, 2020, so we can expect 10-Ks from calendar year filers to reflect these changes in early 2021. 

The amendments give businesses more flexibility in their reporting, modernizing the requirements for a world that didn’t exist the last time these rules were amended. “I am not an advocate for frequent changes in laws and constitutions,” said Thomas Jefferson. “But laws and institutions must go hand in hand with the progress of the human mind.” 

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