Companies that may need to disclose environmental penalties and other environmental information to the Securities and Exchange Commission (SEC) should take note: The disclosure rules are changing. Late last month the SEC finalized amendments to modernize its Regulation S-K, requiring registrants to report information, including environmental penalties and certain other environmental impacts. The amendments are the first update in over 30 years and are an important step toward modernizing these rules. The amendments are very similar to the August 2019 proposed rules discussed here. The new rules will become effective 30 days after publication in the Federal Register.
Of particular note is that the $100,000 trigger for disclosure of actual or potential environmental penalties will change. Under the new rule, the trigger will be raised to at least $300,000. The trigger can be as high as a million dollars under appropriate circumstances, as described below. This may enable companies to avoid disclosing environmental penalties and litigation that they would have been required to report under the long-time rule.
The SEC developed these amendments as part of its Disclosure Effectiveness Initiative, which is designed to simplify disclosure requirements and have those requirements reflect modern business practices. The updates try to improve the readability and quality of disclosures by eliminating repetitive or boilerplate requirements and highlight SEC’s preference for a principles-based and more individualized approach.
Relevant Requirements For Environmental Reporting
Companies subject to SEC requirements have long been obligated to disclose environmental penalties of $100,000 or greater, pursuant to Item 103, 17 C.F.R. § 229.103. That regulation refers to disclosure of “material” litigation, i.e., other than “ordinary routine litigation incidental to the business”:
Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.
Instruction 5 to this item specifically designates an environmental penalty of $100,000 or greater as not being “ordinary” litigation:
Notwithstanding the foregoing, … an administrative or judicial proceeding … arising under any Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primary for the purpose of protecting the environment shall not be deemed “ordinary routine litigation incidental to the business” and shall be described if …
C. A governmental authority is a party to such proceeding and such proceeding involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $100,000; provided, however, that such proceedings which are similar in nature may be grouped and described generically.
The SEC’s amendments raise that level to $300,000 and allow the following additional flexibility:
- The registrant may 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 its subsidiaries on a consolidated basis.
Item 101 (c)
Item 101(c) requires the description of the registrant’s business, focusing on its dominant segments. Currently, disclosure of estimated capital expenditures for environmental control facilities is required if such expenditures are material and must be reported for the current fiscal year, succeeding fiscal year, and any other periods the registrant deems material.
The amendments modify the current regulation to be less prescriptive and provide the registrant with the flexibility to determine whether expenditures during that period of time are material. Regulatory compliance disclosure is also broadened to now include compliance with all material government regulations and not just environmental laws.
Information is material if:
- there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make investment decisions; and
- if there is a substantial likelihood that disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information available.
Of note is that this rule does not address issues related to climate change. In selecting its principles-based approach and providing flexibility to registrants, the SEC is leaving it to each regulated company to determine whether climate information is material.