Although the SEC cancelled the scheduled open meeting (again), it still went ahead and voted to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposals are another component of the “Disclosure Effectiveness Initiative.” As described in the press release, to enable each business to focus on the matters that are material to that business, the proposed amendments take a more principles-based approach to the business and risk factors disclosure requirements. With regard to legal proceedings, the proposal would “continue the current prescriptive approach because that requirement depends less on the specific characteristics of registrants.” There is a 60-day comment period.

The proposed changes are summarized below (based on the fact sheet—to be updated later based on the proposing release):

Development of business (Item 101(a))

  • Provides a non-exclusive list of types of information, which the company would be required to disclose only to the extent the information would be is material to an understanding of the general development of the business;
  • Includes as one of the listed topics “transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy”;
  • Eliminates a prescribed timeframe for this disclosure; and
  • Permits the company, in subsequent filings, to provide only an update focused on material developments in the reporting period, along with an active link to the most recent filing, so that together the disclosure would provide the full discussion of the general development of the business.

Business narrative (Item 101(c))

  • Includes a list of principles-based disclosure topics drawn from those in current 101(c);
  • Includes as one of the topics, to the extent material, human capital, “including any human capital measures or objectives that management focuses on in managing the business,…such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel”; and
  • Expands the regulatory compliance requirement beyond environmental regs to include “material government regulations.”


In remarks on a telephone call on February 6 with SEC Investor Advisory Committee members, SEC Chair Jay Clayton briefly discussed human capital disclosure. Clayton observed that Items 101 and 102 of Reg S-K, which address, to a limited extent, people and properties, were adopted back when companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost. But now, human capital and intellectual property often represent “an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.” However, developing standardized disclosure requirements for “human capital” is not so easy. Given that disclosure requirements should elicit information that is material to making investment decisions, Clayton observed, those requirements may need to differ significantly, depending on the industry and even the company. It may not be possible, Clayton observes, to identify metrics that offer market-wide comparability and perhaps not even industry-wide comparability:

“Each industry, and even each company within a specific industry, has its own human capital circumstances. For example, I would expect that the material human capital information for a manufacturing company will be different from that of a biotech startup, and different from that of a large healthcare provider. Further, the human capital considerations for a car manufacturer will be different from that of a home manufacturer. Because of those differences and the principles of materiality, comparability, and efficiency, I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies.”

As a result, Clayton believed that, for human capital, “it is important that the metrics allow for period-to-period comparability for the company.” Importantly, Clayton believed that human capital should be viewed through the eyes of management, whether the focus is on turnover rates, education or experience of the workforce, availability of workers to fill open positions or other factors. And, he wanted to know, what are investors looking for? (See this PubCo post.)

Legal proceedings (Item 103)

  • Expressly permits hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document to discourage duplication; and
  • Raises the $100,000 disclosure threshold for environmental proceedings involving the government to $300,000.

Risk Factors (Item 105)

  • Requires a summary of the risk factor section if the actual section exceeds 15 pages;
  • Changes the disclosure standard from “most significant” factors to “material” factors; and
  • Requires organization of the risks under relevant headings, with risks applicable generally to an investment in securities located at the end under a separate caption.