SEC proposes rule changes intended to streamline disclosures of business operations, risk factors and legal proceedings

The SEC recently proposed revisions to Regulation S-K to streamline public companies’ disclosures of their business operations, risk factors and legal proceedings.  The proposed revisions affect Items 101(a) and (c), 103 and 105 of Regulation S-K.

Among other changes, the proposed rules would revise the requirements related to the general business description by adopting:

  • a more principles-based approach that will require each company to address matters material to its business, such as revenue-generating activities, dependence on key products, services or customers, status of development efforts, trends in market demand, and competitive conditions[1];
  • a new requirement to describe each company’s human capital resources, including measures and objectives that management uses to manage human resources;
  • a new requirement to discuss the material impact of governmental regulation, disclosure that many companies already provide; and
  • a new requirement to disclose material changes in the company’s previously disclosed business strategy.

In addition, when describing material developments in their businesses, public companies (including smaller reporting companies) would be able to forego a complete description of those developments and instead provide only an update since the last complete description, along with a hyperlink to that description.  Initial registration statements would still require a full description of developments.  Companies would no longer be required to cover all material developments in the last five years but would instead be required to disclose only developments material to the current business.  For newly public companies that lacked revenue in a recent fiscal year, the proposed rules would eliminate prescriptive disclosures regarding the company’s plan of operation, anticipated research and development, new facilities and equipment, and changes in personnel.

The proposed rules would also codify industry practice of organizing risk factors under relevant headings and including subcaptions that adequately describe the risk.  If risk factors exceed 15 pages, however, companies would be required to include a summary of the risk factors in the front of the document, which should be presented in “short, concise, bulleted or numbered statements.”

Under the proposed rules, disclosure of legal proceedings could by satisfied by a hyperlink or cross-reference to disclosure elsewhere in the same document (e.g., risk factors or MD&A) to avoid duplicative disclosure.

We anticipate that these revisions, if adopted, will not revolutionize disclosure practices or substantially lighten public companies’ overall disclosure obligations.  Some companies may conclude that they can omit marginally relevant information that they previously felt compelled to disclose in order to comply with Regulation S-K.  Others – particularly those with extensive risk factor disclosures – may find that their SEC reports will get longer, not shorter.

Comments on the proposed rules should be made within 60 days after publication of the proposals in the Federal Register.

[1] •These changes are partly intended to allow companies to omit previously required disclosures that are irrelevant to their businesses.

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