Modernization of Regulation S-K Items 101, 103, and 105

Federal RegisterOct 8, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR 229, 239, and 240

[Release Nos. 33-10825; 34-89670; File No. S7-11-19]

RIN 3235-AL78

Modernization of Regulation S-K Items 101, 103, and 105

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items have not undergone significant revisions in over 30 years. The amendments update these rules to account for developments since their adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.

DATES:

The final rules are effective on November 9, 2020.

FOR FURTHER INFORMATION CONTACT:

Sean Harrison, Office of Rulemaking, at (202) 551-3430, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is amending

Commission reference

CFR citation

(17 CFR)

Regulation S-K:

§ 229.10

et seq.

Item 101

§ 229.101.

Item 103

§ 229.103.

Item 105

§ 229.105.

Securities Act of 1933 (Securities Act):

Form S-4

§ 239.25.

Securities Exchange Act of 1934 (Exchange Act):

Schedule 14A

§ 240.14a-101.

Table of

Contents

15 U.S.C. 77a

et seq.

15 U.S.C. 78a

et seq.

I. Introduction and Background

II. Discussion of the Amendments

A. General Development of Business (Item 101(a))

1. Elimination of the Five-Year and the Three-Year Disclosure Timeframes

a. Proposed Amendments

b. Comments on the Proposed Amendments

c. Final Amendments

2. Updated Disclosure in Subsequent Filings

a. Proposed Amendments

b. Comments on the Proposed Amendment

c. Final Amendment

3. Disclosure About Business Strategy

a. Proposed Amendments

b. Comments on the Proposed Amendment

c. Final Amendments

B. Narrative Description of Business (Item 101(c))

1. Revenue-Generating Activities, Products and/or Services, and Any Dependence on Revenue-Generating Activities, Key Products, Services, Product Families, or Customers, Including Governmental Customers

a. Proposed Amendments and Comments

b. Final Amendments

2. Status of Development Efforts for New or Enhanced Products, Trends in Market Demand, and Competitive Conditions

a. Proposed Amendments and Comments

b. Final Amendments

3. Resources Material to a Registrant's Business

a. Raw Materials

(ii) Comments on the Proposed Amendments

(iii) Final Amendments

b. The Duration and Effect of All Patents, Trademarks, Licenses, Franchises, and Concessions Held

(i) Proposed Amendments

(ii) Comments on the Proposed Amendments

(iii) Final Amendment

4. A Description of Any Material Portion of the Business That May Be Subject to Renegotiation of Profits or Termination of Contracts or Subcontracts at the Election of the Government

a. Proposed Amendment and Comments

b. Final Amendment

5. The Extent to Which the Business Is or May Be Seasonal

a. Proposed Amendment and Comments

b. Final Amendment

6. Compliance With Material Government Regulations, Including Environmental Regulations

a. Proposed Amendment

b. Comments on the Proposed Amendment

c. Final Amendment

7. Human Capital Disclosure

a. Proposed Amendment

b. Comments on the Proposed Amendment

c. Final Amendment

C. Legal Proceedings (Item 103)

1. Expressly Provide for the Use of Hyperlinks or Cross-References To Avoid Repetitive Disclosure

a. Proposed Amendment

b. Comments on the Proposed Amendment

c. Final Amendment

2. Updated Disclosure Threshold for Environmental Proceedings in Which the Government Is a Party

a. Proposed Amendments

c. Final Amendment

D. Risk Factors (Item 105)

1. Summary Risk Factor Disclosure if the Risk Factor Section Exceeds 15 Pages

a. Proposed Amendment

b. Comments on the Proposed Amendment

c. Final Amendment

2. Replace the Requirement To Disclose the “Most Significant” Factors With the “Material” Factors

a. Proposed Amendment

b. Comments on the Proposed Amendment

c. Final Amendment

3. Require Registrants To Organize Risk Factors Under Relevant Headings

a. Proposed Amendment

b. Comments on the Proposed Amendment

c. Final Amendment

III. Other Matters

IV. Economic Analysis

A. Baseline and Affected Parties

B. Potential Costs and Benefits

C. Anticipated Effects on Efficiency, Competition, and Capital Formation

D. Alternatives

V. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Summary of Comment Letters

C. Summary of the Impact on Collections of Information

D. Burden and Cost Estimates of the Amendments

VI. Regulatory Flexibility Act Certification

VII. Statutory Authority

I. Introduction and Background

On August 8, 2019, the Commission proposed amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosure requirements in Regulation S-K.

The proposals were intended to improve these disclosures

for investors and to simplify compliance for registrants.

See Modernization of Regulation S-K Items 101, 103, and 105,

Release No. 33-10668 (Aug. 8, 2019) [84 FR 44358 (Aug. 23, 2019)] (“Proposing Release”).

The proposals were also consistent with and further promoted the objectives of the Fixing America's Surface Transportation Act (“FAST Act”).

See

Public Law 114-94, 129 Stat. 1312 (Dec. 4, 2015) (requiring, among other things, that the SEC conduct a study, issue a report, and issue a proposed rule on the modernization and simplification of Regulation S-K).

Pursuant to Section 108 of the Jumpstart Our Business Startups Act (“JOBS Act”),

the Commission staff prepared the

Report on Review of Disclosure Requirements in Regulation S-K

(“S-K Study”),

which recommended that the Commission conduct a comprehensive evaluation of its disclosure requirements. Based on the S-K Study's recommendation, the staff initiated an evaluation of the information our rules require registrants to disclose, how this information is presented, where this information is disclosed, and how we can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”).

The overall objective of the Disclosure Effectiveness Initiative was to improve our disclosure regime for both investors and registrants.

Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). Section 108 of the JOBS Act required the Commission to conduct a review of Regulation S-K to determine how such requirements can be updated to modernize and simplify the registration process for emerging growth companies.

See Report on Review of Disclosure Requirements in Regulation S-K

(Dec. 2013), available at

https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf

(“S-K Study”).

See SEC Spotlight on Disclosure Effectiveness,

available at

https://www.sec.gov/spotlight/disclosure-effectiveness.shtml

In connection with the S-K Study and the launch of the Disclosure Effectiveness Initiative, the Commission staff invited public input on how to improve registrant disclosures.

In a separate Concept Release issued in 2016,

the Commission staff revisited the business and financial disclosure requirements in Regulation S-K and requested public comment on whether these requirements provide the information that investors need to make informed investment and voting decisions, and whether any of our rules have become outdated or unnecessary.

To facilitate public input on the Disclosure Effectiveness Initiative, the Commission invited members of the public to submit comments.

See

Request for Public Comment, available at

http://www.sec.gov/spotlight/disclosure-effectiveness.shtml

. Public comments received in response to that request for comment are available on our website.

See

Comments on Disclosure Effectiveness, available at

https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml

See Business and Financial Disclosure Required by Regulation S-K,

Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 2016)] (“Concept Release”).

In developing the proposed amendments to Items 101, 103, and 105 of Regulation S-K, we considered input from comment letters we received in response to these disclosure modernization efforts. We also took into account the staff's experience with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K. As a recent example, in response to the COVID-19 pandemic, the Division of Corporation Finance closely monitored registrants' disclosure about how COVID-19 affected their financial condition and results of operations. Division staff observed that our principles-based disclosure requirements generally elicited detailed discussions of the impact of COVID-19 on registrants' liquidity position, operational constraints, funding sources, supply chain and distribution challenges, the health and safety of workers and customers, and other registrant- and sector-specific matters.

See Division of Corporation Finance CF Disclosure Guidance: Topic No. 9A

(June 23, 2020) (encouraging companies to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures, including MD&A, as facts and circumstances change), available at

https://www.sec.gov/corpfin/covid-19-disclosure-considerations

We also considered the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since the adoption of these disclosure requirements, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, changes in technology (in particular technology that facilitates the provision of, and access to, information), and other changes that have occurred simply with the passage of time. Many of the amendments reflect our long-standing commitment to a principles-based, registrant-specific approach to disclosure. Our disclosure requirements, while prescriptive in some respects, are rooted in materiality and facilitate an understanding of a registrant's business, financial condition and prospects through the lens through which management and the board of directors manage and assess the performance of the registrant. We believe that modernizing Items 101, 103, and 105 will result in improved disclosure, tailored to reflect registrants' particular circumstances, and reduce disclosure costs and burdens.

In response to the proposed amendments, we received numerous comment letters, which we discuss in context below.

In general, commenters supported some or all of the proposed amendments, although many suggested modifications to, and expansions of, the proposals. In some cases, commenters opposed one or more of the proposed amendments, or aspects of them. After considering all of the public comments received, we are adopting the amendments substantially as proposed with certain modifications. The table below briefly summarizes the final amendments:

The public comments we received are available at

https://www.sec.gov/comments/s7-11-19/s71119.htm

. Unless otherwise indicated, the comment letters cited herein are those received in response to the Proposing Release.

The final amendments to Items 101 and 103 will affect only domestic registrants and “foreign private issuers” that have elected to file on domestic forms subject to Regulation S-K disclosure requirements. Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (such as Securities Act Form F-1, F-3, or F-4) specifically refers to Regulation S-K. Form 20-F is the combined registration statement and annual report form used by foreign private issuers under the Exchange Act. It also sets forth certain disclosure requirements for registration statements filed by foreign private issuers under the Securities Act. Instead of Items 101 and 103, the foreign private issuer forms refer to Part I, Item 4 and Item 8.A.7., respectively, of Form 20-F. In contrast, the amendment to Item 105 will affect both domestic and foreign registrants because Forms F-1, F-3, and F-4, like their domestic counterparts, all refer to that Item.

See, e.g.,

Item 3 of Form F-1. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50% of its outstanding voting securities held of record by U.S. residents; and (2) any of the following: (i) A majority of its officers and directors are citizens or residents of the United States; (ii) more than 50% of its assets are located in the United States; or (iii) its business is principally administered in the United States.

See

Securities Act Rule 405 [17 CFR 230.405] and Exchange Act Rule 3b-4(c) [CFR 240.3b-4(c)].

Regulation S-K item

Summary of existing item requirements

Summary of the final amendments

Item 101(a)

Requires a description of the general development of the business of the registrant during the past five years, or such shorter period as the registrant may have been engaged in business

Revises Item 101(a) to:

• Be largely principles-based, requiring disclosure of information material to an understanding of the general development of the business, and eliminating the previously prescribed five-year timeframe.

Revises Item 101(h) to:

• Eliminate the three-year timeframe with respect to smaller reporting companies.

Revises Items 101(a) and (h) to clarify that:

• Registrants, in filings made after a registrant's initial filing, may provide an update of the general development of the business rather than a full discussion. The update must disclose all of the material developments that have occurred since the registrant's most recent filing containing a full discussion of the general development of its business, and incorporate by reference that prior discussion.

Item 101(c)

Requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing upon the registrant's dominant segment or each reportable segment about which financial information is presented in its financial statements. To the extent material to an understanding of the registrant's business taken as a whole, the description of each such segment must include disclosure of several specific matters

Revises Item 101(c) to:

• Clarify and expand the principles-based approach of Item 101(c), with a non-exclusive list of disclosure topic examples (drawn in part from the topics currently contained in Item 101(c));

• Include, 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

• Refocus the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.

Item 103

Requires disclosure of any material pending legal proceedings including 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. Similar information is to be included for any such proceedings known to be contemplated by governmental authorities

Contains a threshold for disclosure based on a specified dollar amount ($100,000) for proceedings related to Federal, State, or local environmental protection laws

Revises Item 103 to:

• Expressly state 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

• Implements a modified disclosure threshold that increases the existing quantitative threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000, but that also affords a registrant the flexibility 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 its subsidiaries on a consolidated basis.

Item 105

Requires disclosure of the most significant factors that make an investment in the registrant or offering speculative or risky and specifies that the discussion should be concise, organized logically, and furnished in plain English. The Item also states that registrants should set forth each risk factor under a subcaption that adequately describes the risk. Additionally, Item 105 directs registrants to explain how each risk affects the registrant or the securities being offered and discourages disclosure of risks that could apply to any registrant

Revises Item 105 to:

• Require summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;

• Refine the principles-based approach of Item 105 by requiring disclosure of “material” risk factors; and

• Require 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.

We discuss our revisions with respect to the proposed amendments in more detail below.

II. Discussion of the Amendments

A. General Development of Business (Item 101(a))

Item 101(a) of Regulation S-K currently requires a description of the general development of the business of the registrant during the past five years, or such shorter period as the registrant may have been engaged in business. In describing the general development of the business, Item 101(a)(1) requires disclosure of the following:

• The year in which the registrant was organized and its form of organization;

• The nature and results of any bankruptcy, receivership or similar proceedings with respect to the registrant or any of its significant subsidiaries;

• The nature and results of any other material reclassification, merger or consolidation of the registrant or any of its significant subsidiaries;

• The acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business; and

• Any material changes in the mode of conducting the business.

The Concept Release solicited input on whether the disclosure provided under this Item continues to be useful

and how this Item might be improved.

A number of commenters on the Concept Release recommended eliminating or streamlining the requirements in Item 101(a).

Several of these commenters recommended limiting Item 101(a) disclosure to material developments,

and a few commenters supported executive summaries and layering techniques for the business section.

See

Concept Release,

supra

note 9, at 23932.

See

Proposing Release,

supra

note 3, at 44361.

See id.

In light of this feedback, we proposed to amend Item 101(a)(1) to make it more principles-based and to provide registrants more flexibility to tailor disclosures to their unique circumstances. We discuss the proposals and our revisions with respect to the final amendments below.

1. Elimination of the Five-Year and the Three-Year Disclosure Timeframes

a. Proposed Amendments

Item 101(a) requires a description of the general development of the registrant's business during the past five years, or such shorter period as the registrant may have engaged in business. Item 101(a) also requires information to be disclosed for earlier periods if material to an understanding of the general development of the business. A requirement to provide a brief outline of the general development of the business for the preceding five years was included in the earliest form requirements for registration statements and annual reports.

The first version of Regulation S-K, adopted in 1977, included a requirement to describe the development of the registrant's business during the prior five years, or such shorter period as the registrant may have been in business.

See, e.g.,

Item 6 of Form A-2 adopted in 1935, which required registrants to outline briefly “the general development of the business for the preceding five years.”

See

Release No. 33-276 (Jan. 14, 1935) [not published in the

Federal Register

]. Additionally, Item 5 of Form A-1, adopted in 1933, required registrants to briefly describe the length of time the registrant had been engaged in its business.

See

Release No. 33-5 (July 6, 1933) [not published in the

Federal Register

See also

S-K Study,

supra

note 6 at 32, n. 88.

See Adoption of Disclosure Regulation and Amendments of Disclosure Forms and Rules,

Release No. 33-5893 (Dec. 23, 1977) [42 FR 65554 (Dec. 30, 1977)].

Item 101(h) sets forth alternative disclosure standards for smaller reporting companies that allow these registrants to, among other things, provide a less detailed description of the registrant's business than is required under Item 101(a).

In addition, Item 101(h) requires a description of three years rather than five years of development of a smaller reporting company's business.

The term “smaller reporting company” is defined in 17 CFR 230.405 and 17 CFR 240.12b-2 as an issuer that is not an investment company, an asset-backed issuer (as defined in 17 CFR 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that had a public float of less than $250 million; or had annual revenues of less than $100 million, and either no public float, or a public float of less than $700 million.

We proposed to amend Item 101(a) to eliminate the five-year disclosure timeframe and to apply a materiality standard to all of a registrant's disclosure of the general development of its business. In addition, we proposed a corresponding amendment to Item 101(h) to eliminate the three-year disclosure timeframe applicable to smaller reporting companies.

The proposed amendment to Item 101(h), however, retained the requirement that if a smaller reporting company has not been in business for three years, it must provide the same information for its predecessors if there are any.

b. Comments on the Proposed Amendments

A number of commenters expressed general support for eliminating the five-year disclosure timeframe.

Several commenters stated that a prescribed disclosure timeframe does not elicit the most relevant disclosure.

One of these commenters stated that the one-size-fits-all, fixed time period under the current rule may discourage registrants from providing relevant disclosure relating to periods outside of the five-year timeframe or result in an inadequate discussion of meaningful recent developments.

See, e.g.,

letters from International Bancshares Corporation (“IBC”), California Lawyers Association (“CLA”), Ernst & Young LLP (“E&Y”), Edison Electric Institute and American Gas Association Accounting Advisory Council (“EEI and AGA”), Society for Corporate Governance (“Society”), British Columbia Investment Management Corporation (“BCI”), Davis Polk & Wardwell (“DP&W”), Nareit, U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (“CCMC”), FedEx Corporation (“FedEx”), and General Motors Company (“GM”).

See, e.g.,

letters from GM, Society, EEI and AGA, CLA, and IBC.

See

letter from GM.

Several commenters opposed eliminating the five-year disclosure timeframe.

One of these commenters stated that the proposal complicates an area where there are no existing reporting problems.

Another commenter stated that the current five-year timeframe is appropriate because it corresponds with other financial reporting requirements in Regulation S-K that have similar five-year disclosure timeframes, such as the selected financial data required by Item 301.

A different commenter stated that, without a prescribed timeframe, some registrants might consider it necessary to include information from decades past, which could significantly increase the amount of disclosure with minimal added value to users.

This commenter recommended that we retain the five-year timeframe and emphasize that only material developments be disclosed.

See, e.g.,

letters from Financial Executives International (“FEI”), CFA Institute, and California Public Employees' Retirement System (“CalPERS”).

See

letter from CalPERS (stating that under the proposal, a registrant could choose to disclose a bankruptcy for only two years rather than for five years as required under the current timeframe).

See

letter from CFA Institute. Item 301 of Regulation S-K [17 CFR 229.301] requires registrants to furnish selected financial data in comparative tabular form for each of the registrant's last five fiscal years and any additional fiscal years necessary to keep the information from being misleading. We have recently proposed amendments to eliminate this requirement.

See infra

note 32 and accompanying text.

See

letter from FEI.

We received a few comments on the proposed elimination of the three-year timeframe in Item 101(h).

One commenter supported eliminating the three-year timeframe.

This commenter stated that investors are generally better able to make informed investment decisions when the disclosure requirements provide a basis for comparison, but noted that smaller reporting companies are by their nature much less comparable to other companies. Another commenter indicated that the Commission should retain the current requirement to provide business development disclosure for predecessors, if any, of the smaller reporting company if the smaller reporting company has not been in business for three years.

See, e.g.,

letters from CLA and CFA Institute.

See

letter from CLA.

See

letter from CFA Institute.

c. Final Amendments

After considering the comments, we are adopting the amendments to Item 101(a) and Item 101(h) as proposed, but with a minor change to the rule text of Item 101(h) for clarity. The amendment to Item 101(a) will focus registrants on information material to an understanding of the development of their business, irrespective of a specific timeframe. Similarly, the amendment to Item 101(h) will eliminate the provision that requires smaller reporting companies to describe the development of their business during the last three years, and will direct smaller reporting companies, in describing the development of their business, to provide information for the period of

time that is material to an understanding of the general development of the business.

While we have considered commenter concerns about eliminating a fixed timeframe for the description of a registrant's business, we continue to believe that the current timeframes of five years and three years, respectively, may not always elicit the most relevant disclosure. With respect to one commenter's belief that the five-year time period should be retained because it corresponds to other disclosure requirements, we do not think that elimination of the specified period will result in the loss of an important correlation with other disclosure requirements.

We believe the final amendments will improve disclosure by affording registrants additional flexibility to tailor their disclosure and provide information material to an understanding of their business. Some registrants may prefer to describe the development of their business over a longer period in order to provide the information that may be material to an investment or voting decision, while others may conclude that the material aspects of their business development can be described over a shorter timeframe. Moreover, we believe the benefits of more tailored and effective disclosure in this context would justify any corresponding loss in comparability.

As noted above, the Commission recently proposed to eliminate Item 301 of Regulation S-K, which requires disclosure of five years of selected financial data, because the information required by that item is largely duplicative of other requirements.

See Commission Guidance on Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,

Release No. 33-10750 (Jan. 30, 2020) [85 FR 12068 (Feb. 28, 2020)] (“MD&A Release”).

2. Updated Disclosure in Subsequent Filings

a. Proposed Amendments

Currently, registrants are required to provide disclosure regarding the general development of the business in certain registration statements and annual reports. For filings made after a registrant's initial filing, we proposed to amend Item 101(a)(2) and Item 101(h) to permit a registrant to provide only an update of its business development disclosure with a focus on material developments, if any, in the reporting period. In addition, the proposed amendments would require a registrant that is using this provision to incorporate by reference a discussion of the general development of the registrant's business that, together with the update, would contain the full discussion. The registrant would be required to incorporate the prior discussion by reference using one active hyperlink to the registrant's most recent filing containing that discussion.

Under this approach, a reader would have access to a full discussion by reviewing the updated business development disclosure and the disclosure from the previous filing that is incorporated by reference. Alternatively, a registrant could elect to provide a complete discussion of its business development, including any material updates, in which case, it would not need to incorporate by reference business development disclosure from a previous filing.

Pursuant to Securities Act Rule 411 [17 CFR 230.411] and Exchange Act Rule 12b-23 [17 CFR 240.12b-23], registrants must, in most cases, include an active hyperlink to information incorporated by reference.

b. Comments on the Proposed Amendment

A number of commenters generally supported permitting the use of incorporation by reference, and hyperlinking to the most recently filed full discussion of the general development of the registrant's business.

One of these commenters stated that this would result in a more organized and efficient picture of the registrant's business for the investing public.

Some of these commenters, while supportive of the proposal, did not support mandating the proposed method to present updated Item 101(a)(1) disclosure, as this method might not always be useful to investors.

These commenters stated that when registrants have frequent material updates (

e.g.,

multiple significant acquisitions), including the full disclosure of the general development of the business in each filing (or every few filings) may be the most effective way to provide appropriate information to investors in a format that is easy for them to understand.

See, e.g.,

letters from Council of Institutional Investors (“CII”), Jeff LaBerge (“LaBerge”), E&Y, FEI, William F. Dunker (“Dunker”), BCI, DP&W, CCMC, Nareit, and FedEx.

See

letter from Dunker.

See

letter from EEI and AGA.

A number of commenters opposed the proposal to allow registrants to provide an update of material developments during the reporting period and require a hyperlink to the full discussion of the general development of the registrant's business disclosure, because they stated that this approach could lead to a disjointed narrative that would not be user-friendly.

One commenter stated the approach would not reduce burdens on registrants as the prior period disclosure has already been prepared.

Several other commenters expressed concern that the term “reporting period” limited the period of time over which a registrant could provide an update about material developments.

See, e.g.,

letters from Chevron Corporation (“Chevron”), CLA, GM, CFA Institute, New York City Bar Association (“NYC Bar Association”), and International Corporate Governance Network (“ICGN”).

See

letter from GM.

See, e.g.,

letters from CLA, E&Y and CalPERS.

We also received comments recommending that the proposal should not mandate the use of a single hyperlink reference.

These commenters stated that if there are multiple updates in more than one reporting period, registrants should be allowed to incorporate by reference and hyperlink to all relevant filings to provide a full discussion of the general development of the business.

See

letter from EEI and AGA.

c. Final Amendment

After considering the comments, we are adopting the amendments to Item 101(a)(2) and Item 101(h) substantially as proposed, but with clarifications.

Under the final amendments, for filings subsequent to its initial registration statement, a registrant may provide an update of the general development of its business disclosing all of the material developments that have occurred, if any, since the most recent full discussion of the general development of its business disclosed in a previously filed registration statement or report. If a registrant chooses this approach, it must incorporate by reference the most recent full discussion of the general development of the registrant's business. Moreover, under the final amendments, registrants are only permitted to incorporate the full discussion of the general development of its business from a single previously filed document. If a registrant does not choose this approach, it must provide a complete discussion of its business development, including any material updates in each filing. In this regard, the approach that we are adopting is more restrictive than existing incorporation by reference requirements that, subject to certain limits, allow registrants to provide disclosure by incorporating by

reference some or all of it from more than one previously filed document.

We are also adopting corresponding amendments to Item 101(h) to permit a smaller reporting company, for filings other than initial registration statements, to provide an update to the general development of the business disclosure, instead of a full discussion, that complies with Item 101(a), including the hyperlink option.

Securities Act Rule 411(e) and Exchange Act 12b-23(e), however, provide that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing, such as incorporating by reference from a second document if that second document incorporates information pertinent to such disclosure by reference to a third document. We remind registrants that, consequently, a filing that includes an update and incorporates by reference the more complete Item 101(a) discussion could not be incorporated by reference into a subsequent filing, such as a Form S-3 or Form S-4.

In response to the concerns expressed by some commenters that the proposal should not be mandatory,

we have added language to the final amendment to clarify that the revision to Item 101(a)(2) provides an optional method for updating general business development disclosure using incorporation by reference to one document. In addition, based on comments received expressing concerns that the term “reporting period” limited the period of time over which a registrant could provide an update about material developments,

the final amendments clarify that registrants using the update option must disclose all of the material developments that have occurred since the most recent full discussion of the general development of its business disclosed in a previously filed registration statement or report.

See, e.g.,

letters from EEI and AGA.

See, e.g.,

letters from CLA, E&Y and CalPERS.

As we noted in the Proposing Release, the repetition of Item 101(a) disclosure in successive filings may obscure important developments in a registrant's business. To the extent that registrants present and update their Item 101(a) disclosure under this method, we believe that the final amendments will help focus investor attention on material developments in a registrant's business.

3. Disclosure About Business Strategy

a. Proposed Amendments

We proposed amending the existing prescribed disclosure topics in Item 101(a)(1) to make them more principles-based. The proposed amendments would replace the list of prescribed disclosure topics with a non-exclusive list of the types of information that a registrant may need to disclose. The proposed amendments would also clarify that disclosure of a topic would be required only to the extent such information is material to an understanding of the general development of a registrant's business. As proposed, amended Item 101(a)(1) no longer would include disclosure of the year that the registrant was organized and its form of organization, or disclosure of any material changes in the mode of conducting the registrant's business in its list of disclosure topics. Nevertheless, such disclosure would continue to be required if material to an understanding of the general development of the registrant's business. In addition, we also proposed to include a new disclosure topic that would require, if material to an understanding of the general development of the business, disclosure of transactions and events that affect or may affect the company's operations, including material changes to a registrant's previously disclosed business strategy. We noted that such disclosure may be material to investors and many registrants currently include it in their initial registration statements.

b. Comments on the Proposed Amendment

Many commenters expressed general support for moving to a more principles-based approach to disclosure about the development of a registrant's business.

Several commenters stated that a more principles-based approach would reduce the disclosure of immaterial information and give registrants the flexibility to focus on information that is material and unique to the registrant.

Several commenters, however, opposed the more principles-based approach under the proposals.

See, e.g.,

letters from CII, Nasdaq, LaBerge, EEI and AGA, Society, BCI, Dunker, DP&W, Nareit, CCMC, FedEx, FEI, and the Humane Society of the United States (“Humane Society”).

See, e.g.,

letters from Society, Nasdaq, Dunker, DP&W, and FEI.

See, e.g.,

letters from Public Citizen, AFL-CIO (principle-based approach would increase the reliance on the subjective judgment of management), Better Markets, Domini Impact Investments LLC (“Domini”) (principles-based approach could reduce the usefulness of corporate disclosures for investors), Principles for Responsible Investment (“PRI”), Breckinridge Capital Advisors (“Breckinridge”), ICGN, and letters from individuals and entities using Letter Type A.

A number of commenters expressed support for including “material changes to a registrant's previously disclosed business strategy” as a non-exclusive disclosure example.

One commenter viewed the strategic orientation of a company as material to investors and suggested that changes to it should be disclosed to investors on a continuing basis.

Several other commenters stated that disclosure of a registrant's business strategy, not just changes to previously disclosed business strategy, should be required for all registrants.

Another commenter expressed concern that limiting the requirement to disclose only material changes in business strategy would reduce the amount of business strategy information that companies are currently providing annually to their investors.

This commenter recommended that the Commission require annual disclosure of a company's business strategy. Another commenter who expressed support for requiring disclosure of material changes to a previously disclosed business strategy stated that the rules should not mandate disclosure of business strategy because it could cause some registrants to disclose competitive or sensitive forward-looking information.

To help mitigate this risk, this commenter recommended that a safe harbor provision be added to the amendment.

See, e.g.,

letters from CII, BCI, CCMC, FedEx, American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”), FEI, CFA Institute, and CalPERS.

See

letter from BCI.

See, e.g.,

letters from AFL-CIO and CFA Institute.

See also

letter from CalPERS (suggesting that the rule should make “clear that material changes in business strategy would not have to be disclosed prospectively”).

See

letter from AFL-CIO.

See

letter from FEI.

Several commenters opposed including transactions and events that affect or may affect the company's operations and material changes to a registrant's previously disclosed business strategy as non-exclusive disclosure topics.

Some of these commenters stated that disclosure of material changes to a registrant's previously disclosed business strategy is unnecessary and duplicative because disclosure regarding changes in business strategy would already be reflected in the MD&A.

Other commenters stated that to the extent any change would constitute a known trend or uncertainty likely to cause the most recent financial results not to be indicative of future results, Item 303 of Regulation S-K already requires such disclosure.

Some commenters that opposed this disclosure topic also stated that the disclosure standard in the proposed amendment was different from the disclosure standard under the MD&A requirements, which provides for disclosure of information that a registrant “reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”

These commenters recommended that, if the proposed amendment were

adopted, the amendment should be revised to harmonize its standard with the MD&A disclosure standard.

See, e.g.,

letters from UnitedHealth Group Incorporated (“UnitedHealth Group”), Dunker, Society, DP&W, Chevron, and GM.

See, e.g.,

letters from UnitedHealth Group, Society, DP&W, Chevron, and GM.

See, e.g.,

letters from DP&W, Chevron, and GM.

See, e.g.,

letters from Society and GM.

Another commenter noted that, absent a definition of the term “business strategy,” it would be difficult for registrants to determine whether disclosure is warranted.

Another commenter stated that there is a broad range in the interpretation of what “strategy” means and that the amendment would not result in disclosures that would enable investors to make meaningful comparisons among companies, even among companies within the same industry.

See

letter from CLA.

See

letter from Chevron.

Several commenters expressed concern that the proposal would require registrants to disclose sensitive proprietary or business information regarding a registrant's business strategy.

One of these commenters recommended that, if adopted, the Commission should clarify that disclosure of proprietary or competitively sensitive information is not required.

See, e.g.,

letters from UnitedHealth Group, Dunker, Society, DP&W, and GM.

See

letter from GM.

Several commenters stated that the proposal could result in disparate treatment between registrants that provide disclosure of their business strategy and therefore would be required to disclose any material changes to their strategy, and registrants that have not previously provided disclosure of their business strategy.

One of these commenters stated that a requirement to provide disclosure of any material change in business strategy could become a deterrent to companies considering conducting an initial public offering.

See, e.g.,

letters from UnitedHealth Group, Dunker, and Society.

See

letter from Society.

c. Final Amendments

We are adopting the amendments to Item 101(a)(1) largely as proposed, but with several modifications in response to comments received. As proposed, the final amendments retain the existing disclosure topics addressing the results of any bankruptcy, receivership, or similar proceedings; the nature and results of any other material reclassification, merger, or consolidation of the registrant or any of its significant subsidiaries; and the acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business.

The language of the disclosure topic regarding the results of any bankruptcy, receivership or similar proceedings differs slightly from the proposal by calling for disclosure of the “nature and effects of any material bankruptcy, receivership, or any similar proceeding

with respect to the registrant or any of its significant subsidiaries.”

The proposed rule text did not include the italicized language. Because the introductory text to Item 101(a)(1) indicates that the disclosure should be provided with respect to the registrant and its subsidiaries, we are making it explicit that Item 101(a)(1)(ii) disclosure should be provided with respect to registrants and their significant subsidiaries.

We are revising the disclosure topic regarding transactions and events that affect or may affect the company's operations, including material changes to a registrant's previously disclosed business strategy, to eliminate the requirement to disclose transactions and events that affect or may affect the company's operations. We were persuaded by the commenter who stated that this disclosure would be required under Item 303 of Regulation S-K.

We agree that the proposed disclosure requirement could result in repetitive disclosures, which would be contrary to one of our objectives in amending Item 101(a). However, we are adopting as a disclosure topic material changes to a registrant's previously disclosed business strategy. While some commenters indicated that the proposal could result in disparate treatment between registrants that currently provide disclosure of their business strategy and those that do not,

we believe that once a registrant has disclosed its business strategy, it is appropriate for it to discuss changes to that strategy, to the extent material to an understanding of the development of the registrant's business. As noted by one commenter, many registrants currently tailor their responses under existing Item 101(a) to provide disclosure regarding their business strategy, although this disclosure is not specifically required.

The final amendments build on these practices. We emphasize, however, that the principles-based approach of the final amendments will provide registrants with the flexibility to determine the appropriate level of detail for these disclosures and should mitigate any disincentives the amendments create for registrants to disclose their business strategy. We are also not adopting a definition of the term “business strategy,” as suggested by one commenter,

to provide registrants with the flexibility to tailor their disclosures according to their facts and circumstances.

See

letter from Chevron.

See, e.g.,

letters from UnitedHealth Group, Dunker, and Society.

See

letter from AFL-CIO.

See

letter from CLA.

We are not adding a requirement to disclose a company's business strategy annually, contrary to the suggestion of a commenter.

Given that the final amendments are intended to make Item 101(a) more principles-based and require disclosure only to the extent material to an understanding of a registrant's business, we believe that requiring annual disclosure of a company's business strategy would be inconsistent with these goals.

See

letter from AFL-CIO.

In addition, we are not adopting a safe harbor to address the concern of disclosing competitive or sensitive forward-looking information, as recommended by one commenter. We believe the principles-based nature of the final amendments to Item 101(a)(1) will provide registrants with considerable flexibility to tailor their disclosures to avoid disclosing competitively harmful information while still providing material information to investors. In addition, the amendments do not alter the application of existing statutory safe harbor provisions of the Private Securities Litigation Reform Act (“PSLRA”) that would be available for forward-looking statements made by registrants.

We therefore do not believe a new safe harbor is necessary.

See

Section 27A of the Securities Act [15 U.S.C. 77z-2 (b)] and Section 21E of the Exchange Act [15 U.S.C. 78u-5(b)].

B. Narrative Description of Business (Item 101(c))

Item 101(c) requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing upon the registrant's dominant segment or each reportable segment about which financial information is presented in the financial statements. To the extent material to an understanding of the registrant's business taken as a whole, the description of each such segment must include ten specific items listed in Item 101(c) (

see

Items (1)-(10) in the list below). Item 101(c) specifies two other items that must be discussed with respect to the registrant's business in general (

see

Items (11)-(12) in the list below), although, where material, the registrant must also identify the segments to which those matters are significant. Item 101(c) requires disclosure of:

Item 101(c)(1) [17 CFR 229.101(c)(1)] specifies that, to the extent material to an understanding of the registrant's business taken as a whole, the description of each segment must include the

information specified in paragraphs (c)(i) through (x). Information in paragraphs (c)(xi) through (xiii) is required to be discussed for the registrant's business in general and, when material, the segments to which these matters are significant also must be identified.

(1) Principal products produced and services rendered;

(2) New products or segments;

(3) Sources and availability of raw materials;

(4) Intellectual property;

(5) Seasonality of the business;

(6) Working capital practices;

(7) Dependence on certain customers;

(8) Dollar amount of backlog orders believed to be firm;

(9) Business subject to renegotiation or termination of government contracts;

(10) Competitive conditions;

(11) The material effects of compliance with environmental laws; and

(12) Number of persons employed.

The Commission removed and reserved Item 101(c)(1)(xi), which required disclosure of company- and customer-sponsored research and development activities, largely because U.S. GAAP requires similar, but broader, disclosure.

See Disclosure Update and Simplification Final Rule,

Release No. 33-10532 (Aug. 17, 2018) [83 FR 50148 (Oct. 4, 2018) (“DUSTR Adopting Release”

). Thus, there currently are twelve enumerated disclosure items under Item 101(c).

Many of the enumerated disclosure requirements in Item 101(c) were adopted in 1973.

As businesses, markets, and technology have changed since that time, some of the prescribed disclosure topics in Item 101(c) are not relevant to all registrants, and these disclosure requirements may elicit disclosure that is not material to a particular registrant. In the S-K Study, the staff recommended a review of these requirements in light of changes that have occurred in the way businesses operate.

In addition, the Concept Release invited comment on whether Item 101(c) continues to provide useful information to investors and how the Item's requirements may be improved.

See New Ventures, Meaningful Disclosure,

Release No. 33-5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)].

See

S-K Study,

supra

note 6, at 99-100.

See

Concept Release,

supra

note 9.

To facilitate application of our principles-based revisions to Item 101, we proposed to amend Item 101(c) to be more clearly principles-based by replacing the current list of specific items with a non-exclusive list of disclosure topic examples.

In developing the proposal, we took into account the comments received on the Concept Release. For example, a number of commenters on the Concept Release stated that working capital practices might be better addressed in MD&A.

Under the proposed amendments to Item 101(c), the revised rule would not explicitly reference the disclosure requirements under Item 101(c)(1)(vi) regarding disclosure of working capital practices, Item 101(c)(1)(ii) requirement regarding disclosure about new segments, or the Item 101(c)(1)(viii) dollar amount of backlog orders believed to be firm. Nevertheless, under the proposed principles-based approach, registrants would have to provide disclosure about these topics, as well as any other topics regarding their business, if they are material to an understanding of the business and not otherwise disclosed. For example, if supply chain finance arrangements used by a registrant are a significant part of its working capital practices, they may be material to understanding the nature of its commercial relationships. While MD&A disclosures on the topic are more focused on the potential material impact of such arrangements on the registrant's periodic cash flows and financial condition, the proposed principles-based approach would call for additional disclosure if material to an understanding of those commercial relationships. We discuss the proposals and our revisions with respect to the final amendments below.

We did not propose to amend the disclosure requirements for smaller reporting companies in Item 101(h)(1) through (6). We believe that this approach will continue to permit smaller reporting companies to provide a less detailed description of their business, consistent with the current scaled disclosure requirements for these companies.

See

Proposing Release,

supra

note 3, at 44364.

Consistent with the proposal, the final amendments to Item 101(c) no longer explicitly reference the disclosure requirements under Item 101(c)(vi) regarding disclosure of working capital practices; or the Item 101(c)(viii) requirement regarding disclosure about new segments and the dollar amount of backlog orders believed to be firm.

a. Proposed Amendments and Comments

We proposed to retain as a listed disclosure topic information regarding revenue-generating activities, products and/or services, and any dependence on key products, services, product families or customers, including governmental customers, to the extent this information is material to an understanding of the registrant's business. We did not receive any comments that addressed this proposal.

b. Final Amendments

We are adopting the amendment as proposed.

Although we did not receive any comments on this proposal, feedback in response to the Concept Release indicated that these elements are key to how reasonable investors often evaluate the future prospects of a registrant's business and that highlighting these topics should elicit more informative disclosures.

We continue to believe that disclosure regarding revenue-generating activities, products and/or services, and any dependence on key products, services, product families, or customers, including governmental customers, generally would be material to an investment decision.

In connection with this amendment, the Commission also proposed several conforming amendments to Form S-4.

See

Section II.C.1 of the Proposing Release,

supra

note 3. We did not receive any comments on these conforming amendments and are adopting them as proposed as well.

See

Proposing Release,

supra

note 3, at 44365.

2. Status of Development Efforts for New or Enhanced Products, Trends in Market Demand, and Competitive Conditions

a. Proposed Amendments and Comments

We proposed to retain as a listed disclosure topic information regarding development efforts for new or enhanced products, trends in market demand, and competitive conditions. We had proposed this disclosure topic, which elicits more granular information of the type currently specified in Item 101(c), in response to comments received on the Concept Release. Commenters had recommended more disclosure of a registrant's competitive position, especially the market share of its products and industry trends shaping the nature of competition.

Our principles-based approach to this topic was intended to provide registrants with flexibility to disclose this information to the extent material to an understanding of their business. We received a few comments on this proposal.

One commenter recommended that the proposal clarify that registrants are not required to disclose proprietary or other sensitive information, which could damage their competitive position.

Another commenter recommended that this disclosure topic be revised to include “substantial trends known to

the company that may ultimately affect market demand.

Id.

See

letters from Society and Investor Environmental Health Network (“IEHN”).

See

letter from Society.

See

letter from IEHN (noting particularly disclosure of trends in the development of peer-reviewed scientific literature demonstrating potential for substantial health or environmental risks associated with the preparer's products or activities).

b. Final Amendments

We are adopting the amendments as proposed. We are not adding a clarification that the disclosure of proprietary or other sensitive information is not required, as suggested by one commenter. We believe the principles-based nature of Item 101(c) disclosure, which the final amendments are intended to improve, should provide registrants with sufficient flexibility in how they disclose this information, to the extent material, without causing undue harm to their business operations. Indeed, based on our experience with the current rules, we are not aware that registrants have faced significant difficulties providing this disclosure. We are also not adopting revisions to the final amendments to include disclosure of substantial trends known to the company that may ultimately affect market demand, as suggested by one commenter. The principles-based disclosure topic should provide registrants with flexibility to disclose information about competition that is material to an understanding of their business. We also note that Item 303(a)(3)(ii) of Regulation S-K requires a registrant to describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material impact (favorable or unfavorable) on net sales or revenues or income from continuing operations. In addition, if the registrant knows of events that will cause a material change in the relationship between costs and revenues, the change in the relationship must be disclosed under Item 303(a)(3)(ii).

Thus, including this disclosure in Item 101(c) could result in duplicative disclosures.

We recently proposed amendments to our MD&A disclosure requirements to modernize and enhance MD&A disclosures.

See

MD&A Release,

supra

note 32.

3. Resources Material to a Registrant's Business

Currently, two of the twelve disclosure requirements in Item 101(c) relate to registrants' resources: Item 101(c)(1)(iii) requires disclosure of the sources and availability of raw materials, and Item 101(c)(1)(iv) requires disclosure of the importance to the segment and the duration and effect of all patents, trademarks, licenses, franchises, and concessions held, each to the extent material to an understanding of the registrant's business taken as a whole. We proposed amending these requirements to refocus registrants' disclosure on all resources material to their business. Specifically, we proposed to retain these disclosure topics with minor modifications and combine them into one principles-based, non-exclusive set of examples of information that should be disclosed to extent material to an understanding of a registrant's business as a whole.

a. Raw Materials

Item 101(c)(1)(iii) currently requires disclosure of the sources and availability of raw materials. We received several comment letters in response to the Concept Release that specifically addressed this requirement.

A few commenters on the Concept Release recommended retaining this requirement.

One of these commenters specified that the disclosure requirement should be retained with a materiality overlay,

while the other commenter stated that disclosure should only be required if raw materials are difficult to obtain.

Another commenter on the Concept Release stated that, when material, registrants provide disclosures in response to the specific sub-items in Item 101(c), including sources and availability of raw materials, in the business narrative or elsewhere, including MD&A.

We proposed retaining sources and availability of raw materials as a listed disclosure topic in Item 101(c).

See

Proposing Release,

supra

note 3, at 44365.

See

letters from Fenwick West LLP (dated Aug. 1, 2016) (“Fenwick”) and New York State Society of Certified Public Accountants (dated July 19, 2016) (“NYSSCPA”), available at

https://www.sec.gov/comments/s7-06-16/s70616.htm.

See

letter from Fenwick.

See

letter from NYSSCPA.

See

letter from Davis Polk & Wardwell LLP (dated July 22, 2016), available at

https://www.sec.gov/comments/s7-06-16/s70616.htm.

(ii) Comments on the Proposed Amendments

We received limited comment on this aspect of the proposed amendments. One commenter supported the proposal, but suggested that it should specifically direct registrants to discuss how climate change will affect access to raw materials.

Another commenter stated that the availability of raw materials as a disclosure topic was established at a time when the U.S. economy was largely manufacturing-based and is no longer representative of the value drivers of today's technology-based and intangible-based economy.

See

letter from Southern Environmental Law Center (“SELC”).

See

letter from CFA Institute.

(iii) Final Amendments

After considering the comments received, we are adopting the amendments as proposed. In accordance with our overall approach to Item 101(c), the final amendments emphasize a principles-based approach and clarify that disclosure regarding sources and availability of raw materials is required only when material to a registrant's business. Although the disclosure topic of raw materials might not be applicable to all registrants, we continue to believe that, for businesses whose products or services depend on raw materials, disclosures regarding such raw materials should be provided to the extent material. The one commenter's suggestion that the final amendments should require all registrants to specifically discuss how climate change will affect access to raw materials is not consistent with the principles-based nature of Item 101(c), so we are not adopting it.

b. The Duration and Effect of All Patents, Trademarks, Licenses, Franchises, and Concessions Held

(i) Proposed Amendments

Item 101(c)(1)(iv) requires disclosure of the duration and effect of all patents, trademarks, licenses, franchises, and concessions held to the extent material to an understanding of the registrant's business taken as a whole. Since the promulgation of this disclosure requirement, intellectual property has become increasingly important to the business of a broad range of registrants. Correspondingly, many registrants provide detailed disclosure in response to Item 101(c)(1)(iv), although disclosure varies among registrants and across industries. The Concept Release solicited feedback on whether to maintain, expand or revise the current scope of this Item and requested comment on the competitive costs of this disclosure. Numerous commenters supported maintaining the current scope of Item 101(c)(1)(iv),

with many

of these opposed to expanding this Item based on competitive concerns.

See, e.g.,

letters from 36 Organizations with an Interest in Trade Secret Protection (dated Aug. 8, 2016) (“36 Organizations”), Association of American Publishers (dated July 21, 2016), American Intellectual Property Law Association (dated Aug. 9, 2016) (“American IP Law Association”), Intellectual Property Owners Association (dated July 15, 2016) (“IP Owners Association”), and Financial Services Roundtable (dated July 21, 2016), available at

https://www.sec.gov/comments/s7-06-16/s70616.htm

See, e.g.,

letters from 36 Organizations, American IP Law Association, Financial Services Roundtable, and IP Owners Association, available at

https://www.sec.gov/comments/s7-06-16/s70616.htm

. Item 101(c)(1)(iv) currently does not refer to disclosure of copyrights or trade secrets and these commenters expressed concern that requiring such disclosure would impose substantial costs on registrants and could have an adverse impact on shareholder value.

In light of this feedback we proposed to retain as a listed disclosure topic the duration and effect of patents, trademarks, licenses, franchises, and concessions held as non-exclusive types of property that may be material to a registrant's business.

(ii) Comments on the Proposed Amendments

In response to the Commission's request for comment on whether the proposed amendments should include as a disclosure topic the duration and effect of copyright and trade secret protection, one commenter stated that the duration and effect of copyright protection is extrinsic information that is derived from applicable U.S. and foreign copyright laws.

This commenter, however, opposed requiring disclosure of the duration of trade secret protection on the ground that this information is generally indefinite as it lasts only as long as the secret is maintained. Another commenter stated that disclosure of a registrant's reliance on copyrights and trade secrets is warranted because such disclosure is significant to an understanding of the registrant's business and strategic plans.

Other commenters, however, opposed requiring disclosure of copyrights and trade secrets, contending that such disclosure would not benefit investors and would be costly and time-consuming for registrants to prepare.

These concerns are consistent with comments we received on the Concept Release, in which commenters indicated that because copyright and trade secret protection is not contingent on registration, a requirement to disclose even a subset of these two types of intellectual property would force registrants to systematically identify and catalog these types of intellectual property, which could impose substantial costs and require significant time.

See

letter from CLA.

See

letter from CFA Institute.

See

letters from Society and GM.

See, e.g.,

letters from 36 Organizations, American Intellectual Property Law Association (Aug. 9, 2016), U.S. Chamber of Commerce (July 20, 2016), FedEx Corporation (July 21, 2016), Intellectual Property Owners Association (July 15, 2016), National Association of Manufacturers (July 21, 2016), Association of American Publishers (July 21, 2016), available at

https://www.sec.gov/comments/s7-06-16/s70616.htm

But see

letters from International Integrated Reporting Council (July 20, 2016) and CFA Institute (Oct. 6, 2016) (supporting the inclusion of copyrights under Item 101(c)), available at

https://www.sec.gov/comments/s7-06-16/s70616.htm

(iii) Final Amendment

After consideration of the comments, we are adopting the amendment as proposed. We are retaining, as a non-exclusive example, disclosure about the duration and effect of all patents, trademarks, licenses, franchises, and concessions held to the extent material to an understanding of the registrant's business taken as a whole. We are not expanding the requirement to include the duration and effect of copyright and trade secret protections because of the cost and other concerns highlighted by commenters.

4. A Description of Any Material Portion of the Business That May Be Subject to Renegotiation of Profits or Termination of Contracts or Subcontracts at the Election of the Government

a. Proposed Amendment and Comments

Item 101(c)(1)(ix) requires, to the extent material to an understanding of the registrant's business taken as a whole, disclosure of any material portion of a business that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.

Business contracts with agencies of the U.S. government and the various laws and regulations relating to procurement and performance of U.S. government contracts impose terms and rights that are different from those typically found in commercial contracts. In a 1972 Notice to Registrants, the Commission noted that government contracts are subject to renegotiation of profit and to termination for the convenience of the Government.

At any given time in the performance of a government contract, an estimate of its profitability may be subject not only to additional costs to be incurred, but also to the outcome of future negotiations or possible claims relating to costs already incurred.

See Defense and Other Long Term Contracts; Prompt and Accurate Disclosure of Information,

Release No. 33-5263 (June 22, 1972) [37 FR 21464 (Oct. 11, 1972)].

See id.

Registrants with U.S. Government contracts tend to disclose that the funding of these contracts is subject to the availability of Congressional appropriations and that, as a result, long-term government contracts are partially funded initially with additional funds committed only as Congress makes further appropriations. These registrants disclose that they may be required to maintain security clearances for facilities and personnel in order to protect classified information. Additionally, these registrants state that they may be subject to routine government audits and investigations, and any deficiencies or illegal activities identified during the audits or investigations may result in the forfeiture or suspension of payments and civil or criminal penalties.

We proposed to retain renegotiation or termination of government contracts as a disclosure topic, citing our continued belief that, when material to a business, disclosure of this information is important for investors. We did not receive any comments that addressed this proposal.

b. Final Amendment

We are adopting the amendment as proposed for the reasons discussed above.

5. The Extent to Which the Business Is or May Be Seasonal

a. Proposed Amendment and Comments

Item 101(c)(1)(v) requires, to the extent material to an understanding of the registrant's business taken as a whole, disclosure of the extent to which the business of the segment is or may be seasonal. Although we recently considered eliminating this disclosure requirement, noting that other Regulation S-K disclosure requirements and U.S. GAAP require disclosures about seasonality in interim periods,

we ultimately decided to retain Item 101(c)(1)(v) and instead to delete Instruction 5 to Item 303(b) of Regulation S-K, which also required a discussion of any seasonal aspects that have had a material effect on a registrant's financial condition or results of operations.

100

We proposed to retain this Item out of concern about the potential loss of information in the fourth quarter regarding the extent to which the business of a registrant or its segment(s) is or may be seasonal

because U.S. GAAP may not elicit this disclosure.

101

See Disclosure Update and Simplification Proposed Rule,

Release No. 33-10110 (July 13, 2016) [81 FR 51607 (Aug. 4, 2016)] (“DUSTR Proposing Release”). Public comments on the DUSTR Proposing Release are available at

https://www.sec.gov/comments/s7-15-16/s71516.htm.

100

The Commission decided to eliminate Instruction 5 to Item 303(b) because U.S. GAAP in combination with the remainder of Item 303 requires disclosures in interim reports that convey reasonably similar information to the disclosures required by Instruction 5 to Item 303(b).

See

DUSTR Adopting Release,

supra

note 71, at 50169.

101

See id.

ASC 270-10-45-11 states that entities should consider supplementing interim reports with information for 12-month periods ended at the interim date to avoid the possibility that interim results with material seasonal variations may be taken as fairly indicative of the estimated results for a full fiscal year.

We received one comment on this aspect of the proposed amendments. The commenter recommended that the Commission require registrants with seasonal businesses to discuss the impact of climate change on their businesses.

102

See

letter from SELC.

b. Final Amendment

We are adopting the amendment as proposed. Consistent with our previous evaluation of this Item, we continue to believe that the seasonality of the business or a segment should be disclosed to the extent it is material to an understanding of the registrant's business. Although a commenter suggested that this non-exclusive example should require disclosure about the impact of climate change on seasonal businesses, consistent with our response to a similar suggestion regarding the raw materials disclosure topic, we are not adding this additional specificity to avoid undermining the principles-based nature of Item 101(c). Our principles-based approach to this disclosure affords registrants sufficient flexibility to address relevant factors that may affect seasonality to the extent material to an understanding of the registrant's business.

6. Compliance With Material Government Regulations, Including Environmental Regulations

a. Proposed Amendment

Item 101(c)(1)(xii) requires disclosure of the material effects of compliance with environmental laws on the capital expenditures, earnings, and competitive position of the registrant and its subsidiaries, as well as any material estimated capital expenditures for the remainder of the fiscal year, the succeeding fiscal year, and such future periods that the registrant deems material.

Pursuant to the National Environmental Policy Act of 1969 (“NEPA”),

103

which mandated consideration of the environment in regulatory action, in 1973, the Commission adopted a new provision to require disclosure of the material effects that compliance with Federal, state, and local environmental laws may have on the capital expenditures, earnings, and competitive position of the registrant, now designated as Item 101(c)(1)(xii).

104

Subsequent litigation

105

concerning both the denial of a rulemaking petition and adoption of the 1973 environmental disclosure requirements resulted in the Commission initiating public proceedings primarily to elicit comments on whether the provisions of NEPA required further rulemaking.

106

As a result of these proceedings, the Commission in 1976 amended the Item 101 requirements to specifically require disclosure of any material estimated capital expenditures for environmental control facilities for the remainder of the registrant's current and succeeding fiscal years, and for any further periods that are deemed material.

107

103

Public Law 91-190, 42 U.S.C. 4321-4347 (Jan. 1, 1970).

104

See Disclosure with Respect to Compliance with Environmental Requirements and Other Matters,

Release 33-5386 (Apr. 20, 1973) [38 FR 12100 (May 9, 1973)] (“Environmental Disclosure Adopting Release”).

105

See Natural Resources Defense Council, Inc.

SEC

, 389 F. Supp. 689 (D.D.C. 1974); and

Natural Resources Defense Council, Inc.

SEC

, 606 F.2d 1031 (D.C. Cir. 1979), rev'g 432 F. Supp. 1190 (D.D.C. 1977).

See also

U.S. Sec. & Exch. Comm'n,

Staff Report on Corporate Accountability

1, 251-259 (Comm. Print 1979) (“Staff Report”) (providing a description of this litigation).

106

See Disclosure of Environmental and Other Socially Significant Matters,

Release No. 33-5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 18, 1975)].

107

See Conclusions and Final Action on Rulemaking Proposals Relating to Environmental Disclosure,

Release No. 33-5704 (May 6, 1976) [41 FR 21632 (May 27, 1976)]. For further discussion of how the Commission has sought to consider environmental effects in its business disclosure requirements,

see infra

Section II.C.2.

Although there is no separate line item requiring disclosure of government regulations that may be material to a registrant's business, it is common practice for many registrants to include disclosure regarding such information in response to Item 101(c)(1)(xii). In response to the Concept Release, a few commenters supported requiring registrants to disclose all government regulations material to their business given that many registrants already voluntarily provide such information.

108

See

Concept Release,

supra

note 9. For a more extensive discussion of the related comment letters

see

Section II.B.6 of the Proposing Release,

supra

note 3.

In recognition of this common practice and because we believed this disclosure would provide important information to investors, we proposed including the material effects of compliance with material government regulations, not just environmental laws, as a listed disclosure topic in Item 101(c).

b. Comments on the Proposed Amendment

A number of commenters supported the proposal to include the material effects of compliance with material governmental regulations, not just environmental laws, as a listed disclosure topic in Item 101(c).

109

Several of these commenters affirmed that the proposal was consistent with current market practice and would provide material information to investors.

110

One commenter suggested that the Commission should require disclosure of the impact of material government regulations on the business and specify that this must include disclosure about environmental risks.

111

This commenter also recommended the Commission adopt a more prescriptive approach to ensure that this disclosure provides investors with consistent, comparable data about regulatory compliance matters. Other commenters recommended that the Commission should require disclosure of international tax strategies.

112

109

See, e.g.,

letters from La Berge, EEI and AGA, Nareit, CCMC, FedEx (expressing support for the comments provided by CCMC), Virginia Harper Ho (“Harper Ho”), American Securities Association (“ASA”), PRI, and Humane Society.

110

See, e.g.,

letters from CCMC, FedEx, and PRI.

111

See

letter from PRI.

112

See, e.g.,

letters from individuals and entities using Letter Type A and PRI.

One commenter stated that the proposed amendment was confusing because the text of the amendment repeatedly used the term “material” and urged the Commission to clarify the rule text.

113

Another commenter recommended that the rule should define the term “environmental regulations” to include, as examples of regulations warranting disclosure, animal-welfare and wildlife regulations, and regulations relating to climate change.

114

113

See

letter from Nareit.

114

See

letter from the Humane Society.

Several commenters opposed the proposal to include the material effects of compliance with material governmental regulations, not just environmental laws, as a listed disclosure topic in Item 101(c).

115

All of these commenters stated that registrants are already required to disclose the material impact of compliance with material governmental regulations in their MD&A, risk factor, or financial statement disclosure. Some of these commenters also expressed concern that the preparation of this disclosure could be burdensome to registrants and may result in boilerplate disclosure, as

registrants might feel compelled to provide lengthy recitations of all of the laws that affect their business and operations.

116

115

See, e.g.,

letters from Society, DP&W, FEI and GM.

116

See, e.g.,

letters from Society, GM and DP&W.

c. Final Amendment

After considering the comments received, we are adopting the amendments largely as proposed with certain modifications. Some commenters opposed the proposal, asserting that disclosure of the material impact of compliance with material governmental regulations is required under MD&A or financial statement requirements. Item 101(c)(1), however, seeks to elicit broader disclosure that may be material to an understanding of the registrant's business as a whole, whereas disclosure in a registrant's MD&A or financial statements may focus more narrowly on the specific impact on a registrant's financial results, liquidity and capital resources or balance sheet. As such, we agree with the commenters that supported the proposal and stated that it would provide material information to investors.

117

See, e.g.,

letters from CCMC, FedEx and PRI.

The final rule will require, to the extent material to an understanding of the business taken as a whole, disclosure of the material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings, and competitive position of the registrant and its subsidiaries. The final rule also will continue to require registrants to include the estimated capital expenditures for environmental control facilities for the current fiscal year and any other subsequent period that is material.

In response to the concerns of a commenter,

118

we have revised the text of the proposed rule to eliminate the second instance of the word “material” that appeared before the term “government.”

119

Although we included “material” there to make clear that disclosure should not include a discussion of every regulation that may apply to a registrant, we were persuaded by commenters that the dual use of the term “material” in the text of the proposed amendment could be confusing.

120

The final amendment more closely follows the existing text of Item 101(c)(1)(xii). As we noted in the Proposing Release, while existing Item 101(c)(1)(xii) does not require disclosure of government regulations that are material to a registrant's business, it is common practice for many registrants to include such disclosure in response to the Item. Consequently, we think this formulation will be less likely to cause confusion. In addition, we believe that this principles-based requirement will help provide investors with material information about a registrant's compliance with the government regulations that are material to an understanding of the registrant's business. For this reason, we are not adding prescriptive requirements to the final amendment, such as requiring disclosure of international tax strategies as recommended by some commenters.

121

The principles-based approach of the final rule should improve the ability of each registrant to tailor its disclosure to discuss only those governmental regulations that are of particular importance to it. The Item does not call for, or require, a recitation of every regulation that affects a registrant's business and operations.

118

See

letter from Nareit.

119

We have also made other non-substantive, clarifying changes to the text of this disclosure topic.

120

See supra

note 116.

121

See, e.g.,

letters from individuals and entities using Letter Type A and PRI.

With respect to one commenter's suggestion that the final amendment define the term “environmental regulations” to include animal-welfare and wildlife regulations, and regulations relating to climate change,

122

we do not believe that this additional specificity is necessary. One of the purposes of the final amendment is to make the disclosure of the material effects of compliance with government regulations more principles-based. Although specific categories of government regulations are not identified in the final amendment, disclosure of the material effects of compliance with government regulations, including animal-welfare and wildlife regulations, would be required if material to an understanding of the registrant's business.

122

See

letter from the Humane Society.

7. Human Capital Disclosure

a. Proposed Amendment

Item 101(c)(1)(xiii) currently requires disclosure of the number of persons employed by the registrant. Some registrants distinguish between the number of full-time and part-time employees, and others specify the number of employees in each department or division. Some registrants with large numbers of employees disclose the approximate number of employees and some registrants discuss their employees' membership in a union or similar organization.

The Concept Release solicited input on this disclosure requirement, requesting feedback on, among other things, whether this numeric disclosure is still important to investors, and what, if any, improvements could be made.

123

Some commenters on the Concept Release recommended retaining and expanding the requirement, while others questioned the continued relevance of the requirement.

124

123

See

Concept Release,

supra

note 9, at 23936.

124

See

Proposing Release,

supra

note 3, at 44369.

Subsequent to the issuance of the Concept Release, we received a rulemaking petition requesting that the Commission adopt new rules, or amend existing rules, to require registrants to disclose information about their human capital management policies, practices and performance.

125

This rulemaking petition generated a substantial number of comments supporting increased disclosure of human capital management policies and specific human capital metrics.

126

125

See

Rulemaking petition to require registrants to disclose information about their human capital management policies, practices and performance, File No. 4-711 (July 6, 2017) (“Human Capital Rulemaking Petition”), available at

https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.

126

See

Comments to File No. 4-711 available at

https://www.sec.gov/comments/4-711/4-711.htm.

In light of the feedback that we received on the Concept Release and the Human Capital Rulemaking Petition, and as part of our efforts to modernize disclosure, we proposed to amend Item 101(c) to replace the current requirement to disclose the number of persons employed by the registrant with a requirement to provide a description of the registrant's human capital resources, including in such description any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant's business taken as a whole.

127

In addition, the proposed amendment included non-exclusive examples of human capital measures and objectives that may be material, depending on the nature of the registrant's business and

workforce, such as measures or objectives that address the attraction, development, and retention of personnel.

127

See

Proposing Release,

supra

note 3. The SEC Investor Advisory Committee also recommended that the Commission take measures to improve the disclosure of a registrant's human capital management, and suggested that any disclosure requirements “should be crafted so as to reflect the varied circumstances of different businesses, and to eschew simple ‘one-size-fits-all’ approaches that obscure more than they add.”

Recommendation of the Investor Advisory Committee Human Capital Management Disclosure

(Mar. 28, 2019), available at

https://www.sec.gov/spotlight/investor-advisory-committee-2012/human-capital-disclosure-recommendation.pdf.

b. Comments on the Proposed Amendment

Many commenters expressed general support for the inclusion of human capital as a disclosure topic.

128

Several commenters expressly supported a principles-based approach to human capital disclosure.

129

While supporting the principles-based approach in the proposal, some commenters urged the Commission to proceed with caution and expressed concerns that prescriptive requirements may elicit immaterial disclosures.

130

Many other commenters called for a combination of principles-based and prescriptive requirements that would include disclosure of specified quantitative metrics.

131

128

See, e.g.,

letters from International Center for Enterprise Engagement (“ICEE”), JT Foxx Reviews Research Team (“JT Foxx”), Intellivest Securities, Inc., Enhance Product Development, Inc. (“EPD”), the Hashimoto's Solution (“Hashimoto”), Auto Connection Manassas VA (“Auto Connection”), Yoga Burn Challenge (“Yoga Burn”), Sustainability Accounting Standards Board (letter dated Oct. 17, 2019, “SASB 1”), Legal & General Investment Management (“LGIM”), CFA Institute, Breckinridge, Paul Rissman (“Rissman”), LaBerge, E&Y, Oregon State Treasury (“OST”), IEHN, Calvert Research and Management (“Calvert”), Dunker, EEI and AGA, CtW Investment Group (“CtW”), CCMC, FedEx, UnitedHealth Group, Harper Ho, Los Angeles County Employees Retirement Association (“LACERA”), PRI, Society for Human Resource Management (“SHRM”), California State Teachers' Retirement System (“CalSTRS”), Judy Schultz (“Schultz”), DP&W, Hermes Equity Ownership Services Limited (“Hermes”), Better Markets Inc. (“Better Markets”), Willis Towers Watson (“Towers Watson”), AFL-CIO, Mercer, Human Capital Management Coalition (“HCMC”), HR Policy Association (“HR Policy”), Senator Mark Warner, (“Sen. Warner”), Public Citizen, Norges Bank Investment Management (“Norges Bank”), CalPERS, the Forum for Sustainable and Responsible Investment (“SIF”), Domini, New York State Common Retirement Fund (“NYSCRF”), Radiant Value Management (“RVM”), GRI, New York City Comptroller (“NYC Comptroller”), BCI, Timothy G. Coville (“Coville”), JUST Capital, Qin Li, ShareAction, Service Employees International Union (“SEIU”), Catherine Smith (“C. Smith”), and.

129

See, e.g.,

letters from ICEE, CII, LaBerge, SHRM, Towers Watson, Mercer, HR Policy, Hashimoto, EPD, Auto Connection, GRI, Yoga Burn, EEI and AGA, CCMC, C. Smith, SEIU and FedEx.

130

See, e.g.,

letters from SHRM, FedEx, and CCMC.

131

See, e.g.,

letters from LGIM, Calvert, OST, CtW, Harper Ho, LACERA, PRI, CalSTRS, Hermes, Better Markets, AFL-CIO, HCMC, BCI, Sen. Warner, Coville, Norges Bank, CalPERS, SIF, Domini, NYSCRF, CFA Institute, ShareAction, JUST Capital and NYC Comptroller.

Many other commenters expressed opposition to the proposed principles-based approach to human capital disclosure.

132

Some of these commenters stated that the proposed principles-based approach would not likely elicit meaningful information about human capital practices, or provide sufficiently comparable disclosure, unless grounded in standardized metrics.

133

Several commenters stated that companies disclose a wide range of human capital information and that this could lead to confusion among investors.

134

One commenter stated that requiring human capital disclosure would be inconsistent with the Commission's mission.

135

Some commenters urged the Commission to consider providing interpretive guidance on human capital in light of existing disclosure obligations.

136

Other commenters expressed concern based on their view that the principles-based approach would rely entirely on the judgment of management to determine the substance of the information to disclose and would result in less disclosure being provided than would be the case under a prescriptive disclosure requirement.

137

132

See, e.g.,

letters from UnitedHealth Group; CLA; David Burton (“Burton”); Amazon Watch, American Federation of State, County and Municipal Employees, As You Sow, California Clean Money Campaign, Campaign for Accountability, Center for American Progress, Congregation of Sisters of St. Agnes, Environment America, Friends Fiduciary Corporation, Global Witness, Green Century Capital Management, Harrington Investments, Inc., Institute for Agriculture and Trade Policy, Interfaith Center on Corporate Responsibility, Jantz Management LLC, Miller/Howard Investments, Inc., New Progressive Alliance, Newground Social Investment, SPC, NorthStar Asset Management, Inc., Northwest Coalition for Responsible Investment, Oil Change International, OIP Trust, Oxfam America, Pax World Funds, Public Citizen, Railroads & Clearcuts Campaign, Reynders, McVeigh Capital Management LLC, Sierra Club, Teamsters, Tri-State Coalition for Responsible Investment, U.S. PIRG, Union of Concerned Scientists, Women's Institute for Freedom of the Press. (“33 Organizations”); GM; DP&W; Domini; NYSCRF; Public Citizen; RVM; FEI; Schultz; Rissman; Society; ICGN; and Breckinridge.

133

See, e.g.,

letters from Domini, RVM, HCMC, CalPERS, Rissman, LGIM, ICGN, OST, NYSCRF, NYC Comptroller, FEI and LACERA.

134

See, e.g.,

letters from FEI, LACERA, HCMC and NYSCRF.

135

See

letter from the Heritage Foundation (contending that the mission of the Commission does not include furthering any social, environmental or other criteria).

136

See, e.g.,

letters from GM, Society, DP&W and Chevron.

137

See, e.g.,

letters from HCMC, CalPERS, NYC Comptroller, Domini, NYSCRF, FEI, PRI, LACERA, Breckinridge, ShareAction and SEIU.

In the Proposing Release, we requested comment on whether the proposed amendment should include other non-exclusive examples of human capital measures or objectives, such as the number and types of employees, including the number of full-time, part-time, seasonal, and temporary workers. A number of commenters supported the inclusion of specific human capital management disclosure metric requirements or examples.

138

Many of these commenters emphasized the importance of comparability and stated that the use of different metrics would make it difficult for investors to analyze and compare information.

139

Several commenters recommended that we require specific, or encourage companies to use certain, third-party disclosure standards or frameworks to provide human capital disclosure.

140

One commenter supported the inclusion of non-exclusive examples that do not focus on numerical measurements, and argued that the disclosure requirement should not promote comparability.

141

This commenter stated that because every registrant is different, the way in which each registrant defines and measures human capital related objectives necessarily varies widely.

138

See, e.g.,

letters from Louis E. Matthews, Jr., Schultz, SASB 1, LGIM, IEHN, Dunker, FCLTGlobal (“FCLTGlobal”), PRI, CalSTRS, Better Markets, HCMC, BCI, Sen. Warner, Public Citizen, CalPERS, SIF, Domini, NYSCRF, NYC Comptroller, ICEE, OST, LACERA, Hermes, Burton, SEIU, CtW, ICGN, Towers Watson, AFL-CIO, 33 Organizations, JT Foxx, EPD, Hashimoto, Auto Connection, Yoga Burn, Bec Brideson, Calvert, Breckinridge, CFA Institute, ShareAction, Qin Li, JUST Capital and Letter Type A.

139

See, e.g.,

letters from SASB 1, LGIM, Calvert, E&Y, OST, FCLTGlobal, LACERA, PRI, CalSTRS, Hermes, SEIU, E&Y, Better Markets, HCMC, BCI, Sen. Warner, Coville, Public Citizen, Norges Bank, CalPERS, SIF, Domini, NYSCRF, RVM, Breckinridge, ShareAction, CFA Institute and NYC Comptroller.

140

See, e.g.,

letters from Domini (recommending frameworks published by the International Organization for Standardization, the Global Reporting Initiative, the Sustainability Accounting Standards Board, the Workforce Disclosure Initiative, and the Carbon Disclosure Project), SASB 1, Coville, Norges Bank (recommending the Sustainability Accounting Standards Board framework), Breckinridge (recommending the Sustainability Accounting Standards Board framework) and RVM.

See also, e.g.,

letters from GRI, ICEE, SASB 1, Coville, CII, LACERA, Domini, RVM, Breckinridge and Norges Bank.

141

See

letter from Towers Watson.

A number of commenters, also highlighting the limitations of mandating or suggesting certain metrics for the purpose of increasing comparability in this area, opposed the inclusion of either non-exclusive examples or prescriptive human capital management disclosure metrics.

142

Some of these commenters stated that there was no consensus on the most appropriate metrics or methodology for human capital management disclosure.

143

Other commenters expressed concern that a list of non-

exclusive examples could be viewed as mandated disclosure, which could result in registrants providing immaterial disclosure.

144

142

See, e.g.,

letters from CCMC, FedEx, SHRM, GM, Mercer, Society, HR Policy, DP&W, FEI and Chevron.

143

See, e.g.,

letters from HR Policy, Society and GM.

144

See, e.g.,

letters from Mercer (“[P]roviding specific examples of the types of measures or objectives that companies focus on in managing their business, such as those that address the attraction, development, and retention of personnel, as proposed, could result in disclosure that is potentially misleading and is less valuable to investors because it is not tailored to a company's specific business or industry.”), Towers Watson, and HR Policy.

In the Proposing Release, we also requested comment on whether we should define human capital. Several commenters stated that human capital should be defined,

145

while a few opposed a Commission definition of the term.

146

One of these commenters stated that there were many definitions of human capital and that the concept is often tailored to the circumstances and objectives of individual companies.

147

The other commenter stated that the Commission should resist defining human capital because there is no standard method to assess “human capital management” and because it is a complex concept with many factors influencing human capital management that vary across industries and individual companies.

148

145

See, e.g.,

letters from CalSTRS, CtW, HCMC, NYC Comptroller, Towers Watson, ICEE and PRI (advocating for defining human capital management as “people's competencies, capabilities and experience, and their motivations to innovate.”).

Cf.

letter from Burton (“definition for human capital should include human capital measures or objectives that management focuses on in managing the business”).

146

See

letters from Mercer and HR Policy.

147

See

letter from HR Policy.

148

See

letter from Mercer.

We also requested comment on whether we should retain the requirement in Item 101(c) for registrants to disclose the number of persons employed by the registrant. Several commenters urged the Commission to retain the requirement.

149

One of these commenters stated that this disclosure provides investors with valuable information that can be used in assessing productivity growth, compensation measures, and capital allocation.

150

A number of commenters recommended that the Commission require additional information regarding the number of persons employed by the registrant, such as the number of full-time, part-time, and contingent workers; the number of seasonal employees; the ratio of full-time to part-time employees; or the number of domestic and foreign employees.

151

Some commenters, however, stated that the requirement to disclose the number of employees was arbitrary, outdated, and of limited use.

152

149

See, e.g.,

letters from CII, 33 Organizations, PRI and CtW.

150

See

letter from CtW.

151

See, e.g.,

letters from CalSTRS, Domini, CalPERS, CII, Burton, BCI, NYC Comptroller, ICEE, LGIM, OST, LACERA, PRI, Hermes, SEIU, CFA Institute, CtW, ICGN, Towers Watson, AFL-CIO, HCMC, Sen. Warner, CalPERS, SIF and NYSCRF.

152

See, e.g.,

letters from EEI and AGA, CCMC, Hermes, Better Markets, CalSTRS, FedEx and Mercer.

c. Final Amendment

After considering public comments, we are adopting this amendment substantially as proposed with certain modifications. Under the final amendments, Item 101(c) will require, to the extent such disclosure is material to an understanding of the registrant's business taken as a whole, a description of a registrant's human capital resources, including any human capital measures or objectives that the registrant focuses on in managing the business. We believe that, in many cases, human capital disclosure is important information for investors. Human capital is a material resource for many companies and often is a focus of management, in varying ways, and an important driver of performance.

The final amendments identify various human capital measures and objectives that address the attraction, development, and retention of personnel as non-exclusive examples of subjects that may be material, depending on the nature of the registrant's business and workforce. We emphasize that these are examples of potentially relevant subjects, not mandates. Each registrant's disclosure must be tailored to its unique business, workforce, and facts and circumstances. Consistent with the views expressed by some commenters, we did not include more prescriptive requirements because we recognize that the exact measures and objectives included in human capital management disclosure may evolve over time and may depend, and vary significantly, based on factors such as the industry, the various regions or jurisdictions in which the registrant operates, the general strategic posture of the registrant, including whether and the extent to which the registrant is vertically integrated, as well as the then-current macro-economic and other conditions that affect human capital resources, such as national or global health matters.

153

Although several commenters expressed concern that the principles-based approach could result in less comparability (as compared to a more prescriptive approach), given the varied and evolving nature of human capital considerations, we believe that this approach will likely lead to more meaningful disclosure being provided to investors. Moreover, we do not believe that prescriptive requirements or a designated standard or framework will ensure more comparable disclosure given the variety in registrant operations as well as how registrants define, calculate, and assess human capital measures.

154

Furthermore, we note that while the final amendments do not require registrants to use a disclosure standard or framework to provide human capital disclosure, as recommended by some commenters,

155

a principles-based approach affords registrants the flexibility to tailor their disclosures to their unique circumstances, including by providing disclosure in accordance with some or all of the components of any current or future standard or framework that facilitates human capital resource disclosure that is material to an understanding of the registrant's business taken as a whole.

153

See, e.g.,

letters from Mercer and HR Policy.

154

See, e.g.,

U.S. Gov't Accountability Office, GAO-20-530, Public Companies: Disclosure of Environmental, Social, and Governance Factors and Options to Enhance Them (July 2020),

available at

https://www.gao.gov/assets/710/707949.pdf

(finding lack of consistency across companies that use the same framework to assess environmental, social, and governance (ESG) matters); Alex Edmans, Grow the Pie: How Great Companies Deliver Both Purpose and Profit (2020) (stating that non-financial measures are inherently incomparable because they depend on a company's unique purpose).

155

See, e.g.,

letters from GRI, ICEE, SASB 1, Coville, CII, LACERA, Domini, RVM, Breckinridge and Norges Bank.

We also are not adopting a definition of the term “human capital” as recommended by some commenters because this term may evolve over time and may be defined by different companies in ways that are industry specific. This approach is consistent with the view expressed by a number of commenters that noted that there are many definitions of human capital and that the concept, while generally well understood, is often tailored to the circumstances and objectives of individual companies.

156

See, e.g.,

letter from HR Policy and Mercer.

In a change from the proposal, a registrant will need to disclose, to the extent material to an understanding of the registrant's business, the number of persons employed by the registrant. We agree with commenters that this disclosure topic should be retained and that it can provide investors with important and useful information that is material to an understanding of the

registrant's business.

157

The number of persons employed by the registrant can help investors assess the size and scale of a registrant's operations as well as changes over time. In addition, we believe this disclosure will complement, and could provide essential context to, any discussion of a registrant's human capital management. Although many commenters recommended that we expand this disclosure topic to include additional metrics, such as the number of full-time, part-time, and contingent workers, and employee turnover,

158

we are not adopting these prescriptive elements because we believe that they would be inconsistent with our objective to make Item 101(c) more principles-based. We note that, under the principles-based approach we are adopting, to the extent that a measure, for example, of a registrant's part-time employees, full-time employees, independent contractors and contingent workers, and employee turnover, in all or a portion of the registrant's business, is material to an understanding of the registrant's business, the registrant must disclose this information.

157

See, e.g.,

letters from CII and CtW.

158

See, e.g.,

C. Legal Proceedings (Item 103)

Item 103 requires disclosure of 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. Item 103 also requires disclosure of the name of the court or agency in which the proceedings are pending, the date instituted, and the principal parties thereto and a description of the factual basis alleged to underlie the proceeding and the relief sought. Similar information is to be included for such proceedings known to be contemplated by governmental authorities.

The Commission first adopted a requirement to disclose all pending litigation that may materially affect the value of the security to be offered, describing the origin, nature and name of parties to the litigation, as part of Form A-1 in 1933.

159

Over time, this disclosure requirement was expanded to include, among other things, the date the proceeding was instituted, the identity of the responsible court or agency, and a requirement that material bankruptcy proceedings involving the registrant or its significant subsidiaries be described and any material proceeding involving a director, officer, affiliate, or principal security holder.

160

Moreover, in connection with NEPA, the legal proceedings disclosure requirement was expanded to require additional disclosure about environmental matters.

161

159

See

Form A-1, Item 17, adopted in Release No. 33-5 (July 6, 1933) [not published in the

Federal Register

160

See

Proposing Release, supra note 3, at 44372.

161

See

Environmental Disclosure Adopting Release,

supra

note 107.

In the Proposing Release, we noted that Item 103 and U.S. GAAP have overlapping disclosure requirements, but that these requirements nonetheless differ in certain respects.

162

Often, in complying with Item 103, registrants repeat some or all of the disclosures provided in the notes to the financial statements under U.S. GAAP or include a cross-reference thereto. In the DUSTR Proposing Release, the Commission solicited comment concerning whether to retain, modify, eliminate, or refer the Item 103 disclosure requirements to the Financial Accounting Standards Board for potential incorporation into U.S. GAAP.

163

Many of the commenters on the DUSTR Proposing Release opposed the integration of Item 103 into U.S. GAAP.

164

162

See

Proposing Release,

supra

note 3, at 44373.

163

See Disclosure Update and Simplification Proposed Rule,

Release No. 33-10110 (July 13, 2016) [81 FR 51607 (Aug. 4, 2016)] (“DUSTR Proposing Release”) at 51633.

164

See

Proposing Release,

supra

note 3, at 44372.

In response to these concerns, the Commission decided to retain the disclosure requirements in Item 103, stating that further consideration was warranted with respect to the implications of potential changes to these requirements.

165

Given the concerns expressed by commenters in response to the DUSTR Proposing Release, and after further consideration of how to improve the disclosure requirements in Item 103, we proposed the following amendments to Item 103.

165

See

DUSTR Adopting Release,

supra

note 71.

1. Expressly Provide for the Use of Hyperlinks or Cross-References To Avoid Repetitive Disclosure

a. Proposed Amendment

In an effort to encourage registrants to avoid duplicative disclosure, we proposed to amend Item 103 to expressly state that this disclosure may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document, such as in Management's Discussion & Analysis (MD&A), Risk Factors, or notes to the financial statements.

b. Comments on the Proposed Amendment

Many commenters supported the use of hyperlinks or cross-references to provide legal proceedings disclosure and to avoid repetitive disclosure.

166

Several commenters indicated that this approach would help decrease duplicative disclosures in filings.

167

Other commenters stated that using hyperlinks would improve the navigability of documents.

168

One commenter stated that many registrants commonly cross-reference to disclosures concerning legal proceedings contained in the notes to the financial statements or elsewhere in a filing.

169

166

See, e.g.,

letters from IBC, CLA, EEI and AGA, DP&W, Nareit, CCMC, FedEx, CII, Society, GM, NYC Bar Association, Nasdaq, Chevron, and ASA.

167

See, e.g.,

letters from EEI and AGA, IBC, CCMC, ASA, Chevron and Nasdaq.

168

See, e.g.,

letters from Society, GM and Nasdaq.

169

See

letter from FEI.

Another commenter, although supportive of this proposal, expressed concern that the use of multiple hyperlinks or cross-references could increase search costs for investors who would have to spend additional time retrieving and piecing together disclosures located in different sections of a filing.

170

This commenter recommended that the amendment place limits on a registrant's use of multiple hyperlinks.

170

See

letter from CII.

One commenter expressed opposition to the use of hyperlinks to provide legal proceedings disclosure because it would result in “search expeditions” to find the disclosure.

171

This commenter claimed that a registrant is best positioned to determine the most effective means to organize and present information in its filing to investors. Another commenter claimed that duplicative information was not problematic if such disclosures were consistent throughout the filing. In addition, this commenter indicated that the proposal did not address inaccurate or inactive hyperlinks.

172

171

See

letter from ICGN.

172

See

letter from CalPERS.

c. Final Amendment

We are adopting the amendment as proposed. The final rules will clarify that registrants are permitted to provide disclosure responsive to Item 103 by hyperlink or cross-reference to legal proceedings disclosure elsewhere in the document, such as in MD&A, Risk Factors, or a note to the financial statements.

We do not believe it is necessary to place a restriction on the ability of registrants to use multiple hyperlinks to

provide disclosure of legal proceedings pursuant to revised Item 103 or address inactive hyperlinks as suggested by some commenters,

173

because a hyperlink used in response to Item 103 would be an internal hyperlink that connects a reader to a different section within the same document or web page (and also would be less likely to become broken or inactive) as opposed to an external hyperlink that connects a reader to a different document. Clarifying that registrants can use hyperlinks furthers a primary goal of the proposal to reduce duplicative disclosure. As we noted in the Proposing Release, in order to comply with existing Item 103, many registrants commonly repeat some or all of the disclosures that are provided in the notes to the financial statements under U.S. GAAP or include a cross-reference to those disclosures. We believe placing restrictions on the use of hyperlinks or cross-references would reduce the flexibility of registrants to present this information in a manner that they deem to be the most effective.

173

See

letters from CII and CalPERS.

2. Updated Disclosure Threshold for Environmental Proceedings in Which the Government Is a Party

a. Proposed Amendments

Instruction 5.C. to Item 103 specifically requires registrants to disclose any proceeding under environmental laws to which a governmental authority is a party unless the registrant reasonably believes it will not result in sanctions of $100,000 or more; provided, however, that such proceedings which are similar in nature may be grouped and described generally. The Commission added this requirement to Item 103 in 1982.

174

Since that time, the $100,000 disclosure threshold for environmental proceedings in which the government is a party has not been changed. We proposed to increase this threshold to $300,000 to adjust it for inflation.

175

In addition, we proposed to reorganize Item 103 to incorporate its instructions into the text of the Item.

174

See Adoption of Integrated Disclosure System,

Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (“1982 Integrated Disclosure Adopting Release”).

175

Starting from May 1981, the month the release in which the $100,000 amount was first published, Commission staff used the Consumer Price Index (CPI) Inflation Calculator (available at

https://data.bls.gov/cgi-bin/cpicalc.pl

) to calculate the inflation adjusted amount to be $285,180.40 as of May 2019. For ease of reference, the Commission rounded this figure to $300,000.

b. Comments on the Proposed Amendments

Comments on the proposed amendment were mixed. Several commenters supported the proposal to revise the $100,000 threshold for environmental proceedings to which the government is a party to $300,000 to adjust for inflation, or supported the retention of a quantitative threshold without recommending a specific amount.

176

One of these commenters concurred that a bright-line disclosure threshold provides a useful benchmark and promotes comparability.

177

Another commenter, while supportive of the increased threshold, recommended that the Commission consider whether the fixed dollar amount should be eliminated in favor of a materiality standard.

178

Other commenters recommended that the threshold should be periodically indexed for inflation.

179

A few commenters suggested adopting a hybrid approach of requiring disclosure of any fine above a quantitative threshold of at least $300,000 that is determined to be material.

180

176

See, e.g.,

letters from Harper Ho, SELC, NYC Bar Association and Nasdaq.

177

See

letter from SELC.

178

See

letter from Nasdaq.

179

See, e.g.,

letters from DP&W, Society and GM.

180

See, e.g.,

letters from Society and DP&W.

Many commenters opposed the proposal to revise the $100,000 threshold to $300,000 to adjust for inflation.

181

Several of these commenters recommended that the proposed amendment use a materiality-based standard rather than a fixed dollar amount.

182

Some of these commenters recommended that the proposed amendment include a non-exhaustive list of qualitative factors that a registrant should consider when assessing the materiality of an environmental proceeding.

183

These commenters suggested that such factors could include whether a fine brought by a governmental authority is indicative of potentially significant environmental compliance problems and whether the fine relates to conduct for which the company previously has been sanctioned. These commenters also suggested that if the Commission were to retain a quantitative threshold, we should correlate the threshold to a registrant's market capitalization or some other benchmark that may be more indicative of materiality on a company-specific basis.

184

Some of these commenters stated that the use of a materiality-based standard would eliminate the guesswork to determine whether a potential monetary sanction will equal or exceed the dollar threshold and require disclosure.

185

Several commenters that supported a materiality-based threshold stated that one-size-fits-all quantitative thresholds are arbitrary and result in disclosure that may not be material to investors and can obscure other, more meaningful information about a company's material legal proceedings.

186

181

See, e.g.,

letters from CII, 33 Organizations, E&Y, IEHN, Society, DP&W, CCMC, NYSCRF, EEI and AGA, David Young, FedEx, FEI, Chevron, CalPERS, Humane Society, Domini, PRI, CFA Institute and GM.

182

See, e.g.,

letters from E&Y, Society, DP&W, CCMC, FedEx, Chevron and GM.

183

See

letters from Society, DP&W and GM.

184

Id.

185

See

letters from Society and DP&W.

186

See, e.g.,

letters from Society and DP&W.

Other commenters, however, opposed the use of a materiality standard for environmental proceedings and stated that larger registrants likely would not provide any disclosure of environmental proceedings under Item 103.

187

A few commenters recommended that we retain the current $100,000 threshold.

188

Several commenters expressed concerns that the proposed $300,000 threshold may result in reduced environmental proceedings disclosure.

189

187

See, e.g.,

letters from CalPERS and PRI.

188

See, e.g.,

letters from CalPERS and Humane Society (suggesting that the $100,000 threshold be maintained or adjusted to reflect an actual data-driven dollar amount that more accurately represents a division between environmental proceedings that pose material risks to businesses and those that do not).

189

See, e.g.,

letters from IEHN, Public Citizen, CalPERS, Domini and PRI.

We also received comments that supported increasing the disclosure threshold above $300,000.

190

However, these commenters did not believe that the threshold should be a fixed dollar amount. These commenters stated that it was more burdensome for larger registrants to gather and disclose environmental proceedings based on a universal fixed threshold applicable to all registrants as such a threshold would likely not be material to larger registrants. These commenters recommended using a threshold that was the greater of $1 million or an amount that was material to the registrant.

191

These commenters stated that such an approach would ensure that information disclosed is useful to investors without the risk of being overly burdensome to the preparers of filings or becoming obsolete due to passage of time.

190

See

letter from EEI and AGA.

191

Id.

c. Final Amendment

After considering the public comments, we are adopting the

amendments to reorganize Item 103 to eliminate the current instructions to the Item and incorporate their contents in the text of Item 103 as proposed. In addition, as discussed in more detail below, we are adopting a modified disclosure threshold that increases the existing quantitative threshold but that also affords a registrant some flexibility by providing a range within which the registrant can select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings.

192

We are also amending Schedule 14A to update a cross-reference to the instructions to Item 103.

The Commission has in the past considered and received feedback on a materiality standard for environmental disclosures.

193

As the Commission noted when it first adopted the $100,000 threshold for disclosure of environmental proceedings in 1981, disclosure of fines by governmental authorities may be of particular importance in assessing a registrant's environmental compliance, as governmental fines may be more indicative of possible illegality and conduct contrary to public policy.

194

At the same time, as pointed out by several commenters on the proposal, for many registrants a one-size-fits-all quantitative threshold may result in the disclosure of information that is not material in assessing whether a registrant has significant environmental compliance problems.

195

193

For example, in 1996, the Task Force on Disclosure Simplification recommended replacing the $100,000 threshold with a general materiality standard or, alternatively, recommended raising the dollar threshold.

See Report of the Task Force on Disclosure Simplification

(Mar. 5, 1996), available at

https://www.sec.gov/news/studies/smpl.htm

. More recently, in 2016, the Commission received feedback from commenters on the DUSTR Proposing Release that opposed the elimination of any bright-line thresholds in Commission disclosure requirements because the thresholds establish a baseline of disclosure for all registrants in certain areas.

See

DUSTR Proposing Release,

supra

note 99.

194

See Proposed Amendments to Item 5 of Regulation S-K Regarding Disclosure of Certain Environmental Proceedings,

Release No. 33-6315 (May 5, 1981) [46 FR 25638 (May 8, 1981)].

195

See, e.g.,

letters from Society and DP&W.

We further observe that environmental proceedings often can be complex from a factual and legal standpoint. A bright-line test can help registrants assess whether a particular proceeding is subject to disclosure and provide certainty about when disclosure is required. However, we also recognize that a single numerical threshold may result in some disclosures that are not material.

After weighing these various considerations, we are persuaded by commenters who suggested a hybrid approach that includes a quantitative threshold while also providing registrants with the flexibility to apply a more tailored disclosure threshold that would best accomplish the Commission's objectives.

196

We believe a hybrid approach will continue to elicit information that is important to investors in assessing a registrant's environmental compliance while enabling registrants to apply a disclosure threshold that is more indicative of materiality on a company-specific basis. For these reasons, we are adopting a modified disclosure requirement for environmental proceedings involving monetary sanctions that sets forth a quantitative disclosure threshold range within which registrants may determine a threshold that will result in disclosure of material information concerning environmental proceedings.

196

See supra

note 184.

Accordingly, under the final rule, disclosure will be required for any proceeding that involves potential monetary sanctions of $300,000 or more, or at the election of the registrant, such other amount that the registrant determines is reasonably designed to result in disclosure of any such proceeding that is material to its business or financial condition. However, irrespective of any alternative threshold adopted by the registrant, disclosure will be required in all cases for any proceeding when the potential monetary sanctions exceed the lesser of $1 million or one percent of the current assets of the registrant and its subsidiaries on a consolidated basis. Furthermore, if a registrant chooses to use a threshold other than the $300,000 threshold, it must disclose this threshold (including any change thereto) in each annual and quarterly report. We believe this approach avoids a mandatory one-size-fits-all disclosure threshold that may potentially result in the disclosure of information that is not material by allowing registrants to determine a company-specific disclosure threshold that is more relevant to their particular circumstances.

We acknowledge commenters' concerns that use of a materiality standard for environmental proceedings could result in larger registrants providing less disclosure under Item 103. For that reason, the final rule stipulates that the alternative disclosure threshold may not exceed certain parameters. The sliding-scale standard of the lesser of $1 million or one percent of the current assets builds on commenter suggestions to use a higher dollar threshold, such as $1 million, or a company-specific benchmark that scales with the size of the company. These parameters, together with the bright-line $300,000 threshold, are intended to ensure that investors continue to receive relevant information about environmental sanctions while also realizing the benefits of a more principles-based approach.

D. Risk Factors (Item 105)

Item 105 requires disclosure of the most significant factors that make an investment in the registrant or offering speculative or risky and specifies that the discussion should be concise and organized logically.

197

The principles-based requirement further directs registrants to explain how each risk affects the registrant or the securities being offered, discourages disclosure of risks that could apply generically to any registrant, and requires registrants to set forth each risk factor under a sub-caption that adequately describes the risk.

197

Smaller reporting companies are not required to provide the information under Item 105 in their Exchange Act filings on Form 10 [17 CFR 249.210], Form 10-K [17 CFR 249.310], and Form 10-Q [17 CFR 249.308a].

In proposing amendments to Item 105, we aimed to address the lengthy and generic nature of the risk factor disclosure presented by many registrants. Although the length and number of risk factors disclosed by registrants vary, some recent studies have indicated that risk factor disclosures have increased over time.

198

For example, one study found that registrants increased the length of risk factor disclosures from 2006 to 2014 by more than 50 percent in terms of word count, compared to the word count in other sections of Form 10-K that increased only by about ten percent, and that this increase in risk factor word count may not be associated with better disclosure.

See

Anne Beatty et al.,

Are Risk Factor Disclosures Still Relevant? Evidence from Market Reactions to Risk Factor Disclosures Before and After the Financial Crisis,

36 Contemp. Acct. Res., 805 (2019). To examine the “informativeness” of risk factor disclosures, the authors of this study analyzed risk factor disclosures about financial constraints and argue that as litigation risk increased during and after the 2008 financial crisis, registrants were more likely to disclose immaterial risks, resulting in a deterioration of disclosure quality.

The inclusion of generic, boilerplate risks that could apply to any offering or registrant appears to contribute to the increased length of risk factor disclosure. Although Item 105 instructs registrants not to present risks that could apply generically to any registrant, and despite longstanding Commission and staff guidance stating that risk factors should be focused on the “most significant” risks and should

not be boilerplate,

199

it is not uncommon for companies to include generic risks. Registrants often disclose risk factors that are similar to those used by others in their industry without tailoring the disclosure to their circumstances and particular risk profile.

199

See, e.g.,

Plain English Disclosure,

Release No. 33-7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)] (“Plain English Disclosure Adopting Release”).

See also

Updated Staff Legal Bulletin No. 7: Plain English Disclosure (June 7, 1999), available at

https://www.sec.gov/interps/legal/cfslb7a.htm

To address these concerns, we proposed the following amendments to the Item 105 risk factor disclosure requirement.

1. Summary Risk Factor Disclosure if the Risk Factor Section Exceeds 15 Pages

a. Proposed Amendment

As a way of addressing the length of risk factor disclosure, the Commission has previously considered requiring a page limit for risk factor disclosure.

200

However, comments received in response to prior initiatives have dissuaded the Commission from adopting such a requirement. For example, while the Concept Release did not seek specific feedback on reducing or limiting the length of risk factor disclosure, several commenters on the Concept Release nonetheless opposed a page limit.

201

Commenters on the Concept Release attributed the growing length of risk factor disclosure to the fear of litigation for failing to disclose risks if events turn negative.

202

Similar comments were received in response to the Disclosure Effectiveness Initiative's general solicitation of comment.

203

200

For example, as part of the

Plain English Disclosure

rulemaking, the Commission solicited comment on whether to limit risk factor disclosure to a specific number of risk factors or a specific number of pages.

See Plain English Disclosure,

Release No. 33-7380 (Jan. 14, 1997), [62 FR 3152, 3163 (Jan. 21, 1997)]. The Commission ultimately did not adopt such limits on risk factor disclosure in that rulemaking.

See

Plain English Disclosure Adopting Release, 63 FR at 6372.

201

See

Proposing Release,

supra

note 3, at 44375.

202

See id.

203

See id.

Given the increasing length of risk factor disclosure and after considering the feedback on the Concept Release, we proposed to amend Item 105 to require summary risk factor disclosure in the forepart of the document if the risk factor section exceeds 15 pages.

b. Comments on the Proposed Amendment

Several commenters supported the proposal to require summary risk factor disclosure.

204

One commenter stated that a summary would enhance readability and make documents containing risk factor disclosure more user-friendly and recommended a lower threshold based on investor-testing.

205

Another commenter recommended that summary risk factor disclosure should be required for all registrants.

206

204

See, e.g.,

letters from CII, E&Y, Better Markets, CCMC, CFA Institute and David Young.

205

See

letter from Better Markets.

206

See

letter from CFA Institute.

A number of commenters opposed the proposal.

207

Several of these commenters expressed concern that investors may focus only on the risk factor summary, which may give them an imprecise understanding of the risks.

208

A few commenters stated that the proposed risk factor summary would not enhance the readability of the document.

209

One of these commenters suggested that the risk factor summary could result in investors discounting the full risk factor presentation.

210

Another commenter stated that registrants would provide lengthy summaries of their risks out of concern about the potential liability for any omissions in their disclosure.

211

Other commenters stated that grouping similar risk factors and including subheadings would achieve the objective of enhancing the readability of risk factors, making a summary duplicative.

212

207

See, e.g.,

letters from CalPERS, International Bancshares, Society, Nareit, UnitedHealth Group, CLA, ICGN, DP&W, and FEI.

208

See, e.g.,

letters from IBC, ICGN, Society, CLA and FEI.

209

See

letters from Society and DP&W.

210

See

letter from DP&W.

211

See

letter from Nareit.

212

See, e.g.,

letters from UnitedHealth Group, Nareit, and Society.

Several commenters emphasized that many registrants decide to provide lengthy risk factor disclosure because they believe this will help limit their legal exposure.

213

One of these commenters stated that many registrants have risk factors that exceed 15 pages in order to provide adequate disclosure about risks that are important for investors to be aware of and to limit legal exposure.

214

This commenter stated that a risk factor summary would not include the appropriate level of detail necessary to understand fully a registrant's risk factors and could open up companies to potential litigation. Another commenter stated that the proposal would not eliminate boilerplate disclosure.

215

One commenter recommended that summary risk factor disclosure be optional.

216

213

See, e.g.,

letters from CCMC, FEI and Allen Huang (“Huang”).

214

See

letter from FEI.

215

See

letter from ICGN.

216

See

letter from UnitedHealth Group.

Another commenter expressed concern that the proposal to require registrants to summarize the “principal” risk factors would effectively require registrants to rank their risk factors, which some registrants may find difficult.

217

Yet another commenter expressed concern that providing summary risk factor disclosure could be burdensome on registrants and stated that the proposal could discourage some companies from going public.

218

217

See

letter from Nareit.

218

See

letter from Society.

c. Final Amendment

We are adopting the amendments substantially as proposed with a modification in response to comments received. Under the final amendments, if a registrant's risk factor disclosure exceeds 15 pages, Item 105(b) will require in the forepart of the document a series of concise, bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky.

219

We believe specifying this format for the risk factor summary will avoid concerns that the requirement could lead to lengthy summaries or result in investors discounting the full risk factor presentation. In a change from the proposal, and for similar reasons, the final amendments limit the risk summary to no more than two pages. We believe that imposing a page limit on the risk summary should lessen the burden of preparing the summary and also act as an incentive for registrants to give due consideration to the risk factors that are material to investors. Because the risk summary is not required to contain all of the risk factors identified in the full risk factor discussion, registrants may prioritize certain risks and omit others. Nonetheless, we believe that a summary of the principal risks will help investors navigate lengthy risk factor disclosure that exceeds 15 pages and enhance the readability and usefulness of the

disclosure for investors. We also note that the requirement to provide a risk factor summary may create an incentive for registrants to reduce the length of their risk factor discussion to avoid triggering the summary requirement, to the extent that such an incentive outweighs perceived litigation risks.

219

Item 3(b) to Form S-11 [17 CFR 239.18] includes such a requirement, stating that where appropriate to a clear understanding by investors, an introductory statement shall be made in the forepart of the prospectus, in a series of short, concise paragraphs, summarizing the principal factors which make the offering speculative. The risk factor summary included in a Form S-11 filing typically consists of a series of bulleted or numbered statements comprising no more than one page on average. Given our experience with this format in the Form S-11 context, we think it provides an appropriate model for the summary risk factor presentation required under the final amendments.

With respect to commenters' concerns that the risk factor summary would require registrants to rank their risk factors or would not include the appropriate level of detail necessary to fully understand a registrant's risks and could subject companies to potential litigation,

220

we note that the final amendment is similar to other disclosure requirements under our rules that require disclosure of a summary.

221

Based on Commission staff experience with those rules, we believe that a summary will not detract from a registrant's more extensive disclosure elsewhere in a filing or subject a registrant to greater litigation risk. Instead, we believe a summary will enhance the ability of investors to process relevant information and will focus registrants on disclosing material risks.

220

See

letters from FEI and Nareit.

221

See, e.g.,

Item 3(b) to Form S-11 and the optional summary in Item 16 to Form 10-K.

Finally, although some commenters suggested a lower threshold for triggering the summary risk factor disclosure or requiring the summary in all instances,

222

we continue to believe that the 15-page threshold is an appropriate threshold. Based on an analysis of filings, Commission staff estimates that the 15-page threshold would affect approximately 40 percent of filers.

223

Thus, if registrants maintain the same length of their risk factor disclosure, the final amendments will result in summary risk factor disclosure being provided in a significant number of filings, without imposing undue costs on registrants with less complex risk profiles.

222

See, e.g.,

letter from Better Markets.

223

See

Proposing Release,

supra

note 3, at 44382-44383.

2. Replace the Requirement To Disclose the “Most Significant” Factors With the “Material” Factors

a. Proposed Amendment

Since the Commission first published guidance on risk factor disclosure in 1964,

224

it has underscored that risk factor disclosure should be focused on the “most significant” or “principal” factors that make a registrant's securities speculative or risky.

225

Notwithstanding this additional guidance, the length of risk factor disclosure and the number of risks disclosed has increased in recent years.

224

See Guides for Preparation and Filing of Registration Statements,

Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 1964)] (“1964 Guides”).

225

“Principal” was the term used in the 1982 Integrated Disclosure Adopting Release and “most significant” was the term used in the Plain English Disclosure Adopting Release.

We proposed to amend Item 105 to change the standard for disclosure from the “most significant” risks to “material” risks

226

to focus registrants on disclosing the risks to which reasonable investors would attach importance in making investment or voting decisions.

226

Securities Act Rule 405 [17 CFR 230.405] and Exchange Act Rule 12b-2 [17 CFR 240. 12b-2] both generally define materiality as information to which there is a substantial likelihood that a reasonable investor would attached important in it investment decision.

b. Comments on the Proposed Amendment

Comments on this proposal were generally supportive. Many commenters expressed support for replacing the requirement to discuss the “most significant” risks with “material” risks.

227

Some commenters stated that changing to a materiality standard would significantly enhance the informative value of this disclosure.

228

Another commenter stated that this proposal could reduce or eliminate generic risk factors.

229

A different commenter conditionally supported the proposal, recommending that we revise the definition of “material” to include “information in which there is a substantial likelihood that disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the total mix of information available in deciding how to vote or make an investment decision.”

230

This commenter expressed concern that the current definition excludes consideration of voting decisions.

227

See, e.g.,

letters from Harper Ho, Burton, NYC Bar Association, GRI, IBC, Better Markets, Nareit, David Young, Nasdaq, CFA Institute and Humane Society.

228

See, e.g.,

letters from IBC and David Young.

229

See

letter from Nasdaq.

230

See

letter from CII.

Cf.

letter from CalPERS (requesting that the Commission clarify and simplify the definition of materiality and use “the definition for materiality that is used in Regulation S-X. Under Regulation S-X, Rule 1-02(0), material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters about which an average prudent investor ought reasonably to be informed.”).

A few commenters opposed the proposed amendment.

231

One of these commenters stated that the other proposed amendments to Item 105 would adequately address the increase in risk factor disclosure without the need to revise the current disclosure standard.

232

Another commenter stated that registrants are subject to litigation over immaterial misstatements or omissions and suggested that, therefore, registrants may prepare their risk factors to address many risks, including risks that are not material.

233

This commenter further expressed concern that a change from the current disclosure standard could create a presumption of materiality in the risk factor section that could lead to some registrants choosing to disclose fewer risks.

231

See, e.g.,

letters from CCMC, AFL-CIO and Chevron.

232

See

letter from AFL-CIO.

233

See

letter from CCMC.

Other commenters stated that changing the disclosure standard from “most significant” to “material” would likely not meaningfully reduce the amount of risk factor disclosures in filings.

234

One commenter recommended that registrants should be required to disclose cybersecurity risk.

235

234

See, e.g.,

letters from Chevron and FEI.

235

See

letter from Better Markets.

c. Final Amendment

After considering the comments, we are adopting the amendment as proposed. Under the final amendment, registrants will be required to disclose the material factors that make an investment in the registrant or offering speculative or risky. We believe that the final amendment will result in risk factor disclosure that is more tailored to the particular facts and circumstances of each registrant, which should reduce the disclosure of generic risk factors and potentially shorten the length of the risk factor discussion, to the benefit of both investors and registrants.

236

Consistent with this principles-based approach, we are not adding a specific requirement to disclose cybersecurity risk as recommended by a commenter.

237

Although certain commenters expressed concerns about the use of the term “material,”

238

we do not believe that the use of that term would be too narrow or would lead to the disclosure of fewer risks. Materiality is a broad concept that encompasses both investment and voting decisions. As the Commission explained in the Concept Release, the concept of materiality is used throughout the federal securities laws. The Supreme Court has held that

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 an investment decision.

239

The Court further explained that information is material if there is a substantial likelihood that disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information available.

240

The term “material” as used in the final amendments to Item 105, as well as in the amendments to Items 101 and 103, is defined under Rule 12b-2 of the Exchange Act and Rule 405 of the Securities Act. As the Commission has previously stated, the definitions of “material” in Rule 12b-2 and Rule 405 are consistent with the Supreme Court's holding in

TSC Industries.

241

236

At the same time, we do not expect the final amendment will discourage registrants from disclosing material risks that would enable investors to make informed investment decisions.

237

See

letter from Better Markets.

238

See, e.g.,

letters from CCMC, CII and CalPERS.

239

See Basic Inc.

Levinson,

485 U.S. 224, 231 (1988) quoting

TSC Industries, Inc.

Northway, Inc.,

426 U.S. 438, 449 (1976). In

TSC Industries,

the Supreme Court adopted a standard for materiality in connection with proxy statement disclosure under Schedule 14A and Rule 14a-9 of the Exchange Act. 426 U.S. at 449 at n. 10. ( [T]he SEC's view of the proper balance between the need to insure adequate disclosure and the need to avoid the adverse consequences of setting too low a threshold for civil liability is entitled to consideration [and] [t]he standard we adopt is supported by the SEC.”).

240

See Matrixx Initiatives, Inc.

Siracusano,

131 U.S. 1309, 1318 (2011) quoting

TSC Industries,

426 U.S. at 449). In

Matrixx Initiatives,

the Court applied the materiality standard, as set forth in

TSC Industries

and

Basic.

In articulating these standards, the Supreme Court recognized that setting too low of a materiality standard for purposes of liability could cause management to “bury shareholders in an avalanche of trivial information.”

Id.

at 1318 (quoting

TSC Industries,

426 U.S. at 448-449).

241

See

Concept Release,

supra

note 9, at 23926;