SEC Votes To Ease Rules On Company’s Business, Legal Proceedings And Risk Factor Disclosures

For those who see 2020 emerging as the peak year for corruption in US capital markets – or what little is left of them now that the Fed is in charge of everything – the SEC just gave you a big thumbs up.

Moments ago, the top US regulator voted to ease rules on a company’s business, legal proceedings and risk disclosures, paradoxically at a time when frauds like Wirecard run rampant and not even their auditors can catch them at the act. Of course, “enabling fraud” would not sound very professional, so instead the SEC said in its statement that it had “modernized” the “description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K.” And since “these disclosure requirements have not undergone significant revisions in over 30 years” the SEC said that “the amendments the Commission is adopting today update these items to reflect the many changes in our capital markets and the domestic and global economy in recent decades.”

What it really meant is that it will now be even easier for companies to engage in fraud and have a perfectly legal claim that the SEC never required them to disclose various shady aspects of their business.

“Today we modernized our public company business disclosure rules for essentially the first time in over 30 years,” said SEC Chairman Jay Clayton. “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. 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.”

The SEC further said that the modernization of Items 101, 103, and 105 “is intended to elicit improved disclosures, tailored to reflect registrants’ particular circumstances, which are designed will improve disclosures for investors and add efficiencies to the compliance efforts of registrants.” And since the market is now all GenZers who have the attention span of a gnat, the SEC concludes that “the amendments are also intended to improve the readability of disclosure documents, as well as discourage repetition and reduce the disclosure of information that is not material.”

Here are the highlights on the voted changes:

• amend Item 101(a) by:
  • making it largely principles-based, requiring disclosure of information material to an understanding of the general development of the business;
  • replacing the previously prescribed five-year timeframe with a materiality framework; and
  • permitting a registrant, in filings made after a registrant’s initial filing, 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, which will be incorporated by reference;
• amend Item 101(c) by:
  • clarifying and expanding its principles-based approach, with a non-exclusive list of disclosure topic examples drawn in part from topics currently contained in Item 101(c);
  • 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; and
  • refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws;
• amend Item 103 by:
  • expressly stating 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; and
  • implementing a modified disclosure threshold for certain governemental environmental proceedings resulting in monetary sanctions that increases the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, but that also affords a registrant some flexibility by allowing the registrant, at its election, to 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 one percent of the current assets of the registrant; and
• amend Item 105 by:
  • requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;
  • refining the principles-based approach of Item 105 by requiring disclosure of “material” risk factors; and
  • requiring risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.