S.E.C. Changes Disclosure Rules for Legal Proceedings, Risk Factors, Human Capital

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No matter who occupies the White House this time next year, the impact of the Trump-era S.E.C. on boards will continue to be felt for a long time to come.

Even as Corporate America continues its shift towards more ESG-related transparency, the agency under Chairman Jay Clayton, has promulgated a series of regulatory changes designed to reduce requirements for companies when it comes to disclosure, and shift to more principles-based disclosure rather than strict guidance.

Yesterday, the S.E.C. announced the first “modernization” of Regulation S-K in nearly 30 years. The amendments, first proposed more than a year ago and passed yesterday 3-2, give companies more latitude when it comes to disclosing risk factors and the potential impact of legal actions on the business.

Meanwhile, it also made changes to emphasize the growing importance of human capital in the effectiveness of businesses. Clayton said he was “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.”

Still, said Clayton, the S.E.C. wouldn’t expect every company to report the same human-capital metrics. “It would run counter to our proven disclosure system, particularly as we first increase regulatory emphasis in an area of such wide variance, for us to attempt to prescribe specific, rigid metrics that would not capture or effectively communicate these substantial differences,” he said. “That said, under the principles-based approach, I do expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.”

The rule changes (which you can read in full here) include:

  • Changing the level at which a company must disclose environmental legal actions involving the U.S. government from $100,000 in sanctions to $300,000—or they can select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or 1% of their current assets.
  • Permitting companies to provide only an update of the general development of the business focused on material developments that have occurred since its most recent full discussion of the development of its business.
  • Including, as a disclosure topic, a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business.
  • Requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages.

The amendments will be effective 30 days after publication in the Federal Register.

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