Modernization of Regulation S-K Items 101, 103, and 105, 44358-44390 [2019-17410]

Download as PDF 44358 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR 229, 239, and 240 [Release Nos. 33–10668; 34–86614; File No. S7–11–19] RIN 3235–AL78 Modernization of Regulation S–K Items 101, 103, and 105 Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is proposing for public comment 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 proposed amendments are intended to update our rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material. SUMMARY: Comments should be received on or before October 22, 2019. ADDRESSES: Comments may be submitted by any of the following methods: DATES: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/proposed.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 11–19 on the subject line. jbell on DSK3GLQ082PROD with PROPOSALS2 Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–11–19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. We will post all comments on our internet website (https://www.sec.gov/rules/ proposed.shtml). Comments are also available for website viewing and printing in our Public Reference Room, 100 F Street NE, Washington, DC 20549 VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Sandra Hunter Berkheimer or Elliot Staffin, 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: We are proposing to amend 17 CFR 229.101 (‘‘Item 101’’), 17 CFR 229.103 (‘‘Item 103’’), and 17 CFR 229.105 (‘‘Item 105’’) of 17 CFR 229.10 et seq. (‘‘Regulation S– K’’) under the Securities Act of 1933 (the ‘‘Securities Act’’) and the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’). Table of Contents I. Introduction and Background II. Description of the Proposed Amendments A. General Development of Business (Item 101(a)) B. Narrative Description of Business (Item 101(c)) C. Legal Proceedings (Item 103) D. Risk Factors (Item 105) III. General Request for Comments IV. Economic Analysis A. Baseline and Affected Parties B. Potential Costs and Benefits C. Anticipated Effects on Efficiency, Competition, and Capital Formation D. Alternatives E. Request for Comments V. Paperwork Reduction Act A. Summary of the Collections of Information B. Summary of the Proposed Amendments’ Effects on the Collections of Information C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments VI. Regulatory Flexibility Act Certification VII. Small Business Regulatory Enforcement Fairness Act VIII. Statutory Authority and Text of Proposed Rule and Form Amendments I. Introduction and Background We are proposing amendments to modernize the description of business PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosure requirements in Regulation S–K. We are proposing amendments to these items to improve these disclosures for investors and to simplify compliance for registrants.1 Pursuant to Section 108 of the Jumpstart Our Business Startups Act (‘‘JOBS Act’’),2 the Commission staff prepared the Report on Review of Disclosure Requirements in Regulation S–K (‘‘S–K Study’’),3 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’’).4 The overall objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for both investors and registrants. 1 The proposed amendments are also consistent with and further promote 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). In the Report on Modernization and Simplification of Regulation S– K, the staff recommended that the Commission consider combining the description of material physical properties required in Item 102 with the description of business in Item 101(c). See Report on Modernization and Simplification of Regulation S–K (Nov. 23, 2016), available at https:// www.sec.gov/reportspubs/sec-fast-act-report2016.pdf. The Commission considered the staff recommendation, but did not propose to combine Item 102 with Item 101. See FAST Act Modernization and Simplification of Regulation S– K, Release No. 33–10425 ((Oct. 11, 2017) [82 FR 50988 (Nov. 2, 2017)]. Instead, the Commission adopted amendments to Item 102 to emphasize the materiality standard applicable to that disclosure, while preserving the industry-specific instructions to that Item. See FAST Act Modernization and Simplification of Regulation S–K, Release No. 33– 10618 (Mar. 20, 2019) [84 FR 12674 (April 2, 2019)] (‘‘FAST Act Adopting Release’’). We believe that, in light of our proposed amendments to Item 101, combining the two items would not improve registrants’ business disclosure or simplify compliance. 2 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. 3 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’’). 4 See SEC Spotlight on Disclosure Effectiveness, available at https://www.sec.gov/spotlight/ disclosure-effectiveness.shtml. E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 In connection with the S–K Study and the launch of the Disclosure Effectiveness Initiative, the Commission staff received public input on how to improve registrant disclosures.5 In a separate Concept Release issued in 2016,6 the Commission staff revisited the business and financial disclosure requirements in Regulation S–K and requested public comment on whether they provide the information that investors need to make informed investment and voting decisions, and whether any of our rules have become outdated or unnecessary. In developing the proposed amendments, we considered input from comment letters we received in response to these disclosure modernization efforts.7 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. Regulation S–K was adopted in 1977 to foster uniform and integrated disclosure for registration statements under both the Securities Act and the Exchange Act, and other Exchange Act filings, including periodic and current reports.8 In 1982, the Commission 5 In connection with the S–K Study, we received public comments on regulatory initiatives to be undertaken in response to the JOBS Act. See Comments on SEC Regulatory Initiatives Under the JOBS Act: Title I—Review of Regulation S–K, available at https://www.sec.gov/comments/jobstitle-i/reviewreg-sk/reviewreg-sk.shtml. To facilitate public input on the Disclosure Effectiveness Initiative, members of the public were invited to submit comments. See Request for Public Comment, available at https://www.sec.gov/spotlight/ disclosure-effectiveness.shtml. Public comments received to date on the topic of Disclosure Effectiveness are available on our website. See Comments on Disclosure Effectiveness, available at https://www.sec.gov/comments/disclosureeffectiveness/disclosureeffectiveness.shtml. We refer to these letters throughout as ‘‘Disclosure Effectiveness’’ letters. 6 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’’). 7 Unless otherwise indicated, comments cited in this release are to the public comments on the Concept Release, supra note 6, which are available at https://www.sec.gov/comments/s7-06-16/ s70616.htm. 8 The Commission adopted the initial version of Regulation S–K following issuance of the report by the Advisory Committee on Corporate Disclosure led by former Commissioner A.A. Sommer, Jr., which recommended adoption of a single integrated disclosure system. See Report of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission, Cmte. Print 95–29, House Cmte. On Interstate and Foreign Commerce, 95th Cong., 1st. Sess (Nov. 3, 1977) (‘‘Report of the Advisory Committee’’), available at https:// 3197d6d14b5f19f2f440-5e13d29c4c016cf 96cbbfd197c579b45.r81.cf1.rackcdn.com/ VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 expanded and reorganized Regulation S–K to be the central repository for its non-financial statement disclosure requirements.9 The Commission’s goals in adopting integrated disclosure were to revise or eliminate overlapping or unnecessary disclosure requirements wherever possible, thereby reducing burdens on registrants and enhancing readability without affecting the provision of information material to an investment decision.10 The Commission adopted line-item requirements in Regulation S–K to elicit specific disclosure within broad categories of information material to an investment decision. Some of these requirements provide registrants with the flexibility to determine the disclosure that is material to an investment decision.11 These disclosure requirements are often referred to as ‘‘principles-based’’ because they articulate a disclosure concept rather than a specific line-item requirement.12 Principles-based rules rely on a registrant’s management to evaluate the significance of information in the context of the registrant’s overall business and financial circumstances and to determine whether disclosure is necessary.13 As the Commission stated collection/papers/1970/1977_1103_ AdvisoryDisclosure.pdf. This version of Regulation S–K included only two disclosure requirements— a description of business and a description of properties. See Concept Release, supra note 6, and accompanying text. 9 See Adoption of Integrated Disclosure System, Release No. 33–6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (‘‘1982 Integrated Disclosure Adopting Release’’). 10 See id. 11 On several occasions, the Commission has reiterated that its requirements seek disclosure of information material to an investment decision. See, e.g., Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33–9106 (Feb. 8, 2010) [75 FR 6290 (Feb. 8, 2010)] (‘‘Climate Change Release’’) at 6292–6293 (reiterating that information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or, put another way, if the information would alter the total mix of available information); Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies, Investment Advisers, Investment Companies, and Municipal Securities Issuers, Release No. 33–7558 (July 29, 1998) [63 FR 41394 (Aug. 4, 1998)] at 41395 (stating that our disclosure framework requires companies to disclose material information that enables investors to make informed investment decisions). 12 See Executive Compensation and Related Person Disclosure, Release No. 33–8732A (Aug. 29, 2006) [71 FR 53157 (Sept. 8, 2006)] (‘‘As described in the Proposing Release and as adopted, the Compensation Discussion and Analysis requirement is principles-based, in that it identifies the disclosure concept and provides several illustrative examples.’’). 13 See Report of the Advisory Committee, supra note 8 (‘‘Although the initial materiality determination is management’s, this judgment is, of PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 44359 in the Concept Release, emphasizing principles-based disclosure may allow a registrant to more effectively tailor its disclosure to provide the information about its specific business and financial condition that is material to an investment decision and in turn may reduce the amount of disclosure that may be irrelevant, outdated or immaterial.14 In contrast, some line-item requirements in Regulation S–K employ bright-line, quantitative thresholds to specify when disclosure is required, or require all registrants to disclose the same type of information. These requirements are sometimes referred to as ‘‘prescriptive’’ disclosure requirements because they do not rely on management’s judgment to determine when disclosure is required. The benefits of prescriptive disclosure requirements can include comparability, consistency, and ease in determining when information must be disclosed.15 The Concept Release sought input on whether our disclosure requirements should be more principles-based, prescriptive, or a combination of both. Many commenters supported a more principles-based approach 16 while course, subject to challenge or question by the Commission or in the courts.’’). 14 See Concept Release, supra note 6. 15 See id. For a discussion of the potential economic effects of switching from a prescriptive to a more principles-based disclosure requirement, including a potential loss of comparability, see infra Sections IV.B.1 and 2 and IV.D. 16 See letters from R.G. Associates, Inc. (July 6, 2016) (‘‘RGA’’), American Bankers Association (July 15, 2016), Deloitte & Touche LLP (July 15, 2016) (‘‘Deloitte’’), New York State Society of Certified Public Accountants (July 19, 2016) (‘‘NYSSCPA’’), U.S. Chamber of Commerce (July 20, 2016) (‘‘Chamber’’), BDO USA LLP (July 20, 2016) (‘‘BDO’’), Corporate Governance Coalition for Investor Value (July 20, 2016) (‘‘CGCIV’’), International Integrated Reporting Council (July 20, 2016) (‘‘IIRC’’), Railpen Investments (July 21, 2016) (‘‘Railpen’’), National Association of Manufacturers (July 21, 2016) (‘‘NAM’’), American Chemistry Council (July 19, 2016) (‘‘ACC’’), The American Petroleum Institute (July 21, 2018) (‘‘API’’), Business Roundtable (July 21, 2016), UnitedHealth Group, Inc. (July 21, 2016) (‘‘United Health’’), Center for Audit Quality (July 21, 2016) (‘‘CAQ’’), Securities Industry and Financial Markets Association (July 21, 2016) (‘‘SIFMA’’), Ernst & Young LLP (July 21, 2016) (‘‘E&Y’’), PNC Financial Services Group (July 21, 2016) (‘‘PNC’’), Edison Electric Institute and American Gas Association (July 21, 2016) (‘‘EEI and AGA’’), Grant Thornton LLP (July 21, 2016) (‘‘Grant’’), KPMG LLP (July 21, 2016) (‘‘KPMG’’), PricewaterhouseCoopers LLP (July 21, 2016) (‘‘PWC’’), Cornerstone Capital Inc. (July 21, 2016) (‘‘Cornerstone’’), Crowe Horwath LLP (July 21, 2016) (‘‘Crowe’’), America Gas Association (July 21, 2016) (‘‘AGA’’), Prologis, Inc. (July 21, 2016) (‘‘Prologis’’), National Association of Real Estate Investment Trusts (July 21, 2016) (‘‘NAREIT’’), Allstate Insurance Company (July 21, 2016) (‘‘Allstate’’), Davis Polk & Wardwell LLP (July 22, 2016) (‘‘Davis’’), Chevron Corporation (July 22, 2016) (‘‘Chevron’’), Fenwick West LLP (Aug. 1, E:\FR\FM\23AUP2.SGM Continued 23AUP2 44360 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 other commenters supported some combination of both principles-based and prescriptive rules.17 We are proposing amendments to Items 101, 103, and 105 18 in light of the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since their adoption, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, which may affect the relevance of current disclosure requirements, changes in technology (in particular the availability of information), and changes such as inflation that have occurred simply with the passage of time.19 For example, Item 101 mandates certain disclosures that may be outdated while Item 103 includes a dollar threshold for proceedings related to environmental 2016) (‘‘Fenwick’’), Reardon Firm (Aug. 3, 2016) (‘‘Reardon’’), National Investor Relations Institute (Aug. 4, 2016) (‘‘NIRI’’), Sullivan & Cromwell LLP (Aug. 9, 2016), Exxon Mobil Corporation (Aug. 9, 2016), FedEx Corporation (July 21, 2016) (‘‘FedEx’’), Institute of Management Accountants (July 29, 2016), Shearman & Sterling LLP (Aug. 31, 2016) (‘‘Shearman’’), Nasdaq, Inc. (Sept. 16, 2016) (‘‘Nasdaq’’), Northrop Grumman Corporation (Sept. 27, 2016), General Motors Company (Sept. 30, 2016) (‘‘General Motors’’) and Financial Executives International (Oct. 3, 2016) (‘‘Financial Executives International’’). 17 See letters from Council of Institutional Investors (July 8, 2016) (‘‘CII’’), Railpen, New York State Comptroller (July 21, 2016) (‘‘NYSC’’), California State Teachers’ Retirement System (July 21, 2016) (‘‘CalSTRS’’), Pension Investment Association of Canada (July 17, 2016), Medical Benefits Trust (July 15, 2016) (‘‘Medical Benefits Trust’’), Principles for Responsible Investment (July 19, 2016) (‘‘PRI’’), Legal & General Investment Management (July 20, 2016) (‘‘LGIM’’), Walden Asset Management (July 19, 2016) (‘‘Walden’’), SEC Investor Advisory Committee (June 15, 2016) (‘‘IAC’’), AFLAC (July 19, 2016) (‘‘AFLAC’’), Domini Social Investments LLC (July 21, 2016) (‘‘Domini Social’’), NYC Comptroller (July 21, 2016) (‘‘NYC Comptroller’’), AFL–CIO (July 21, 2016) (‘‘AFL– CIO’’), California Public Employees’ Retirement System (July 21, 2016) (‘‘CalPERS’’), British Columbia Investment Management Corporation (July 21, 2016), Stephen Percoco (July 24, 2016) (‘‘S. Percoco’’), Americans for Financial Reform (Aug. 10, 2016) (‘‘Americans for Financial Reform’’) and CFA Institute (Oct. 6, 2016) (‘‘CFA Institute’’). Four commenters supported a combination that emphasized a principles-based approach (Walden, AFLAC, Ball Corporation (July 19, 2016) (‘‘Ball Corporation’’) and S. Percoco) and seven commenters supported a combination that emphasized a prescriptive approach (IAC, NYC Comptroller, American Federation of State, County and Municipal Employees (July 21, 2016) (‘‘AFSCME’’), Maryland State Bar Association (July 21, 2016) (‘‘Maryland Bar Securities Committee’’), AFL–CIO, Americans for Financial Reform and CFA Institute). 18 The Commission recently rescinded Item 503(c) of Regulation S–K and replaced it with new Item 105 of Regulation S–K. See FAST Act Adopting Release, supra note 1. 19 See infra note 279 (noting that while Items 101, 103, and 105 have not undergone significant revisions in over 30 years, many characteristics of the registrants have changed substantially over this time period). VerDate Sep<11>2014 18:47 Aug 22, 2019 Jkt 247001 protection laws that was set in 1982.20 Further, numerous commenters cited the risk factor disclosure requirements as needing improvement.21 We believe that modernizing these disclosure items would result in improved disclosure, tailored to reflect registrants’ particular circumstances, and reduce disclosure costs and burdens. For each of the disclosure requirements addressed in this release, we considered the merits and drawbacks of pursuing a principlesbased versus prescriptive approach. We also considered each requirement as a component of a broader framework that will achieve the disclosure objectives of the Securities Act and the Exchange Act in the most effective and efficient manner. As discussed in greater detail in Section II below, we propose to revise Items 101(a) (description of the general development of the business), 101(c) (narrative description of the business), and 105 (risk factors) to emphasize a principles-based approach because the current disclosure requirements may not reflect what is material to every business, and, as past developments have demonstrated, disclosure requirements, and in particular prescriptive disclosure requirements, can become outdated in these areas. We believe this approach would elicit more relevant disclosures about these items. In contrast, we are proposing a more prescriptive approach for Item 103 because that requirement depends less on the specific characteristics of individual registrants. Our proposed amendments would: 22 • Revise Item 101(a) to be largely principles-based, requiring: 20 See id. e.g., letters from CAQ, AFLAC, Chamber, FedEx, CGCIV, NAM, ACC, SIFMA, E&Y, EEI and AGA, Wilson Sonsini Goodrich & Rosati (July 21, 2016) (‘‘Wilson Sonsini’’), NAREIT, Davis, Fenwick, NIRI, Shearman, PWC, General Motors, and Financial Executives International. 22 We are also proposing amendments to Item 101(h) of Regulation S–K [17 CFR 229.101(h)], which permits a smaller reporting company to fulfill its disclosure obligations under Item 101, including with respect to its business development, by providing the disclosure specified under paragraph (h). ‘‘Smaller reporting company’’ is defined in 17 CFR 229.10(f) 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: (i) Had a public float of less than $250 million; or (ii) had annual revenues of less than $100 million and either: (A) No public float; or (B) a public float of less than $700 million. Business development companies, which are a type of investment company, are not eligible to be smaller reporting companies. See, e.g., Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33–8819 [(July 5, 2007) [72 FR 39670 (July 19, 2007)], at 39674. 21 See, PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 Æ Disclosure of information material 23 to an understanding of the general development of the business and eliminating a prescribed timeframe for this disclosure; and Æ In filings made after a registrant’s initial filing, only an update of the general development of the business with a focus on material developments in the reporting period with a hyperlink to the registrant’s most recent filing (e.g., initial registration statement or more recent filing if one exists) that, together with the update, would contain the full discussion of the general development of the registrant’s business. • Revise Item 101(c) to: Æ Clarify and expand its principlesbased approach, with disclosure topics drawn from a subset of the topics currently contained in Item 101(c); Æ Include, as a disclosure topic, human capital resources, including 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; and Æ Refocus the regulatory compliance requirement by including material government regulations, not just environmental laws, as a topic. • Revise Item 103 to: Æ Expressly state that the required information may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and Æ Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation. • Revise Item 105 to: Æ Require summary risk factor disclosure if the risk factor section exceeds 15 pages; Æ Refine the principles-based approach of Item 105 by changing the disclosure standard from the ‘‘most significant’’ factors to the ‘‘material’’ factors; and Æ Require risk factors to be organized under relevant headings, 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.24 23 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. See supra note 14 and accompanying text. 24 The proposed amendments to Items 101 and 103 will affect only domestic registrants and E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation. II. Description of the Proposed Amendments jbell on DSK3GLQ082PROD with PROPOSALS2 A. General Development of Business (Item 101(a)) Item 101(a) of Regulation S–K 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.25 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.26 The Concept Release solicited input on whether the disclosure provided under this Item continues to be useful and how this Item might be improved.27 A number of commenters recommended ‘‘foreign private issuers’’ that have elected to file on domestic forms. This is because 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. Instead of Items 101 and 103, the foreign private issuer forms refer to Part I of Form 20–F. See, e.g., Item 4.a. of Form F–1. In contrast, the proposed 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. 17 CFR 230.405. See also 17 CFR 240.3b–4(c). 25 17 CFR 229.101(a). Item 101(a) states that information shall be disclosed for earlier periods if material to an understanding of the general development of the business. 26 17 CFR 229.101(a). 27 See Concept Release, supra note 6, at 23932. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 eliminating or streamlining the requirements in Item 101(a).28 Several of these commenters recommended limiting Item 101(a) disclosure to material developments,29 and a few commenters supported executive summaries and layering techniques for the business section.30 In light of the feedback received, we are proposing amendments to Item 101(a)(1) that would provide more flexibility to tailor disclosures to the unique circumstances of each registrant, which in turn could result in improved disclosures for investors. In addition, for filings other than initial registration statements, we are proposing to require only material updates to this disclosure. 1. Eliminate Prescribed Timeframe 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.31 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,32 and 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.33 The Concept Release solicited comments on whether the current fiveyear timeframe for this disclosure is appropriate, or whether a shorter or longer timeframe should be considered.34 Several commenters recommended reducing the five-year timeframe for disclosure to a two- or three-year timeframe, or permitting well-established companies to provide the information through other means 28 See letters from Allstate, Chamber, FedEx, CGCIV, EEI and AGA, Fenwick, NAREIT, NIRI, NYSSCPA, PNC, SIFMA, Davis, General Motors, and Financial Executives International. 29 See letters from NAREIT, PNC, SIFMA, and Fenwick. 30 See letters from Deloitte and CAQ. 31 17 CFR 229.101(a). 32 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 3 at 32, n. 88. 33 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)]. 34 See Concept Release, supra note 6. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 44361 (such as a filer information page on the company’s website) with updates only required every three years or more frequently if there has been a substantial change.35 One of these commenters suggested linking the timeframe to the two years presented in the financial statements to allow users to focus on material events in the current period.36 Some of these commenters noted that this information does not change significantly from year to year and indicated that repeating these disclosures each year, especially for well-established companies, provides limited value to investors and may potentially obscure or distract from more important information included in the document.37 We do not think it is necessary to prescribe a timeframe for which registrants should provide disclosure regarding the general development of their business. The currently required five-year timeframe may not elicit the most relevant disclosure for every registrant. 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 decision, while others may conclude that the material aspects of their business development can be described over a shorter timeframe. We are proposing to revise Item 101(a) to eliminate the fiveyear disclosure timeframe and require registrants to focus on the information material to an understanding of the development of their business, irrespective of a specific timeframe. For similar reasons, we are also proposing to revise Item 101(h) to eliminate the provision that currently requires smaller reporting companies to describe the development of their business during the last three years.38 We believe that these proposed revisions would result in disclosure of information that is material to investors’ understanding of the development of a registrant’s business while reducing outdated and irrelevant disclosure. 2. Require Only Updated Disclosure in Subsequent Filings Currently registrants are required to provide disclosure regarding the general development of the business in 35 See letters from Allstate, NYSSCPA, and EEI and AGA. 36 See letter from Allstate. 37 See letters from EEI and AGA. 38 We are proposing only to eliminate the required timeframe in Item 101(h). We are, however, proposing to retain 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. E:\FR\FM\23AUP2.SGM 23AUP2 44362 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules registration statements and annual reports.39 The Concept Release sought comment on whether to allow registrants to omit this disclosure from filings other than the initial Securities or Exchange Act registration statement filed by the registrant and instead disclose only material changes in subsequent reports.40 Several commenters recommended revising the requirement to distinguish between new and established registrants, stating that much of the disclosure required under this Item is redundant for registrants already subject to the reporting requirements.41 Many of these commenters supported limiting the full disclosure required by Item 101(a) to the initial filing and only requiring disclosure of material changes in subsequent filings,42 with a few of these commenters supporting the use of cross-references or hyperlinks to either the prior full disclosure or the relevant Form 8–K 43 reports of material developments.44 A few commenters opposed limiting the full disclosure required by Items 101(a) and 101(c) to initial filings with follow-up disclosure of material changes in subsequent filings based on the belief that such a revision would require investors to search through multiple filings in a time-consuming attempt to understand the current state of a registrant’s business development and operations.45 We propose to retain the requirement for registrants to describe the general development of the business in initial registration statements under the Securities Act and Exchange Act.46 For filings subsequent to a registrant’s initial registration statement, we propose revising Item 101(a)(1) to require an update of this disclosure, with a focus on material developments, if any, in the reporting period, including if the business strategy has changed.47 We 39 See 17 CFR 229.101(a). Concept Release, supra note 6. 41 See letters from Chamber, FedEx, CGCIV, EEI and AGA, PNC, and SIFMA. 42 See letters from SIFMA, PNC, Allstate, and Fenwick. 43 17 CFR 249.308. 44 See letters from SIFMA and PNC. 45 See letter from Maryland Bar Securities Committee; see also letter from RGA (stating that it is not always possible to fully understand a registrant’s business if its business development must be ascertained from a variety of sources). 46 Although, as discussed below, we propose to amend Item 101(a)(1), we are retaining Item 101(a)(2) and redesignating it as Item 101(a)(3). 47 Registrants are currently permitted to provide Item 101(a) disclosure by incorporating by reference some or all of the required disclosure from a previous filing pursuant to Securities Act Rule 411 (17 CFR 230.411) or Exchange Act Rule 12b–23 (17 CFR 240.12b–23). Therefore, our proposal to require only an update of the Item 101(a)(1) disclosure in jbell on DSK3GLQ082PROD with PROPOSALS2 40 See VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 also propose to require that, pursuant to § 230.411 or § 240.12b–23, a registrant incorporate by reference, and include an active hyperlink 48 to, the most recently filed disclosure that, together with the update, would present a full discussion of the general development of its business.49 Under this approach, a reader would have access to a full discussion by reviewing the updated disclosure and one hyperlinked disclosure.50 As noted by one commenter, registrants often repeat information from year-to-year in annual reports on Form 10–K,51 with this disclosure changing very little from filing to filing.52 This commenter also observed that there is no need for registrants to include this disclosure in both registration statements and annual reports as investors can easily access information about the general development of business through company websites or the Commission’s EDGAR system, which was not the case when Regulation S–K was first adopted.53 Because repetitive information may obscure more important information, we believe the proposed amendments would help focus investor attention on material developments in the reporting period. By also requiring that a registrant use one hyperlink to connect the updated disclosure with the previous disclosure, which together would result in a full discussion of its general business development, the amendment as proposed would help limit any burdensome effect on investors caused by this discussion being located in more than one document.54 a filing made subsequent to a registrant’s initial registration statement is a clarification of our existing rules rather than a substantive change. 48 The SEC Investor Advisory Committee has recommended the use of hyperlinks to reduce redundant disclosure in SEC filings. See letter from IAC. 49 The Commission recently revised Rules 411 and 12b–23 to require the inclusion of an active hyperlink to information incorporated into a registration statement or report by reference if such information is publicly available on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (‘‘EDGAR’’). See FAST Act Adopting Release, supra note 1 at 12694–12695. 50 Alternatively, a registrant may elect to provide a complete discussion of its business development, including material updates, in which case no hyperlink would be required. 51 17 CFR 249.310. 52 See letter from PNC. 53 See id. 54 For similar reasons, we are proposing 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 proposed Item 101(a)(2), including the proposed hyperlink requirement. See the proposed amendment of Item 101(h). PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 3. Include Material Changes to Business Strategy as Potential Disclosure Topic We are proposing to amend Item 101(a)(1) to be more principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose, and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant’s business.55 We believe that such an approach would elicit material disclosure for investors while also providing the flexibility to tailor the disclosure to reflect the circumstances of each registrant. Three of the four matters that we are proposing to list as disclosure topics are currently covered in Item 101(a)(1): • Material bankruptcy, receivership, or any similar proceeding; • The nature and effects of any 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. We are also proposing to include as a listed disclosure topic, to the extent material to an understanding of the registrant’s business, transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy. Item 101(a) does not currently require disclosure of material changes to a registrant’s previously disclosed business strategy. The Concept Release solicited input on whether Item 101(a) should be revised to require the disclosure of a registrant’s business strategy; whether investors would find such disclosure important or useful and, if so, whether this requirement should be included in Management’s Discussion and Analysis (‘‘MD&A’’); 56 and whether ‘‘business strategy’’ should be defined.57 Commenters were divided on whether disclosure of a registrant’s business strategy should be a requirement.58 Most of the commenters 55 Proposed Item 101(a) refers to materiality in the introductory language of paragraph (a)(1). While materiality is repeated in three of the four listed topics that follow, this is not intended to create a second or different analysis regarding materiality for any such topic. 56 Item 303(a) [17 CFR 229.303(a)]. 57 See Concept Release, supra note 6. 58 Several commenters supported requiring disclosure of a registrant’s business strategy. See, e.g., letters from IIRC, NEI Investments (July 21, 2016), NYSSCPA, PRI, S. Percoco, AFL–CIO and International Corporate Accountability Roundtable (July 19, 2016). Other commenters opposed requiring disclosure of a registrant’s business strategy. See letters from Allstate, Fenwick, E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 that opposed a mandatory business strategy disclosure requirement did so on the grounds that because a registrant’s business strategy could be proprietary, its disclosure could cause competitive harm.59 Many registrants currently include disclosure regarding their business strategy in their initial registration statements. We believe that information regarding material changes to a previously disclosed business strategy may be material information for investors. We are therefore proposing to include material changes to a registrant’s previously disclosed business strategy as a listed disclosure topic under Item 101(a). However, if a registrant has not previously disclosed its business strategy, we are not proposing to make the disclosure of that strategy mandatory in a Commission filing because of the concerns raised by commenters that such a requirement could force registrants to disclose proprietary information that could be harmful to their competitive position.60 To the extent that other matters beyond those listed in the amended item are material to an understanding of the general development of a registrant’s business, the registrant would be required to disclose those matters as well. Request for Comment 1. Is a prescribed timeframe for disclosure regarding the general development of a registrant’s business necessary or desirable? If we should retain a prescribed timeframe, is the current five-year timeframe appropriate, or should it be longer or shorter? 2. Alternatively, should we require a more detailed discussion of a registrant’s general development of business on a periodic basis, such as every three years, and summary disclosure in other years? If so, would three years be an appropriate period, or should it be shorter or longer? 3. For filings other than initial registration statements, should we no longer require a full discussion of the general development of the registrant’s business, and require instead an update to the general development of the business disclosure with a focus on material developments in the reporting period, as proposed? 4. When only updated business disclosure is provided in a filing, should Maryland Bar Securities Committee and CFA Institute, although CFA Institute supported voluntary disclosure of a registrant’s business strategy. 59 See letters from Allstate, Fenwick, and Maryland Bar Securities Committee. 60 See, e.g., letter from Fenwick. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 we require the incorporation by reference of, and active hyperlink to, the most recently filed disclosure that, together with the update, would present a full discussion of the general development of a registrant’s business, as proposed? Would such an approach, which would enable a reader to review the updated disclosure and one hyperlinked disclosure, facilitate an investor’s understanding of the general development of a registrant’s business? 5. Would registrants find it difficult to apply the proposed principles-based requirements? How could we alleviate any expected difficulties? 6. Would principles-based requirements for Item 101(a) effectively facilitate the provision of information that is material to an investment decision? If not, how might Item 101(a) be further improved? 7. Should we provide a list of topics that may be material to an understanding of a registrant’s business development, as proposed? Are the proposed topics (transactions and events that affect or may affect the company’s operations, including material changes to a previously disclosed business strategy; bankruptcy, receivership, or any similar proceeding; the nature and effects of any other material reclassification, merger or consolidation of the registrant or any of its significant subsidiaries; and the acquisition or disposition of a material amount of assets other than in the ordinary course of business) appropriate? Should we exclude any of our proposed topics? Are there other topics that should be added (e.g., material changes in the mode of conducting the business)? Should we require disclosure of any or all of the proposed topics in all circumstances? 8. Should we make disclosure of business strategy mandatory in Commission filings? If so, how should ‘‘business strategy’’ be defined and what can we do to address concerns about confidentiality? 9. Should we revise Item 101(h) to eliminate the provision that currently requires smaller reporting companies to describe the development of their business during the last three years, as proposed? Is a prescribed timeframe for such disclosure necessary or desirable? If we should retain a prescribed timeframe, is the current three-year timeframe appropriate, or should it be longer or shorter? 10. We are proposing to retain the current requirement in Item 101(h) that if a smaller reporting company has not been in business for three years, it must provide the same information for predecessor(s) of the smaller reporting PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 44363 company if there are any. Should we eliminate or adjust this predecessor disclosure requirement for smaller reporting companies? A registrant that is not a smaller reporting company must also provide information about its predecessors in certain circumstances under current Item 101(a)(2). Should we eliminate the predecessor disclosure obligations for those registrants? 11. Should we permit certain registrants to provide the general business development disclosure by other means (e.g., by a filer information page on the company’s website)? If so, which registrants? Should we limit the use of such alternative means to wellknown seasoned issuers? Are there concerns raised by the posting of the disclosure on a company’s website (e.g., regarding how long the company must retain the business development disclosure, when it must update the disclosure, and liability issues)? If so, how should those concerns be resolved? 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: 61 (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; 61 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; where material, the segments to which these matters are significant also must be identified. E:\FR\FM\23AUP2.SGM 23AUP2 44364 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 (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 employees.62 The earliest forms of registration statements and annual reports required a brief outline of the general character of the business done and intended to be done by a registrant.63 Many of the enumerated disclosure requirements in Item 101(c) were adopted in 1973.64 The 1973 adopting release noted that, in making investment decisions, venture capitalists and underwriters typically obtained specific information from companies about their competitive position and methods of competition in their respective industries and, accordingly, the new requirements were expected to provide similar information to the investing public.65 At the same time, the Commission also added requirements for the disclosure of the amount of backlog orders, the sources and availability of raw materials essential to the business, the number of employees and working capital practices.66 In the S–K Study, the staff recommended reviewing the description of business for continuing relevance in light of changes that have occurred in the way businesses operate, which may make other disclosures relevant that are not expressly addressed under the current requirements.67 The Concept Release sought comment on whether Item 101(c) continues to provide useful information to investors and how the 62 The Commission recently 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). 63 See, e.g., Item 5 of Form A–2 adopted in 1935, which required registrants to outline briefly ‘‘the general character of the business done and intended to be done by the registrant and its subsidiaries.’’ See Release No. 33–276 (Jan. 14, 1935) [not published in the Federal Register]. Additionally, Items 3 through 5 of Form A–1, adopted in 1933, required registrants to briefly describe ‘‘the character of business done or intended to be done,’’ disclose a list of states where the issuer owned property and was qualified to do business, and 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]. 64 See New Ventures, Meaningful Disclosure, Release No. 33–5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)]. 65 See id. 66 See id. 67 See S–K Study, supra note 3, at 99–100. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 Item’s requirements may be improved.68 In particular, the Concept Release sought comment on the impact of listing the then thirteen requirements and whether the prescriptive items result in disclosure of information that is not important to some registrants.69 A number of commenters recommended revising Item 101(c) to make it more principles-based.70 A few commenters recommended emphasizing that the sub-items enumerated in Item 101(c) are examples only,71 while another commenter recommended revising the Item to specify that registrants should consider whether information that does not fall into the enumerated examples should nonetheless be disclosed.72 Some commenters recommended retaining the Item as it currently stands.73 Because the 12 items may not be relevant to all registrants, they can elicit disclosure that is not material to a particular registrant. For the most part, Item 101(c) currently provides that a registrant must disclose the enumerated items to the extent material to an understanding of the registrant’s business taken as a whole. Based on the comments received that were critical of this provision,74 it appears, however, that many registrants may interpret Item 101(c) as requiring disclosure of each enumerated item, even if it is not material. We believe that shifting to an updated and more principles-based disclosure framework for Item 101(c) would encourage registrants to exercise judgment in evaluating what disclosure to provide, which would result in disclosure more appropriately tailored to a registrant’s specific facts and circumstances. The Concept Release further sought comment on whether any of the current requirements in Item 101(c) should be presented in a different context, such as MD&A or risk factors.75 A number of commenters provided recommendations on the requirement to disclose working capital practices.76 Several of these commenters stated that working capital practices might be better addressed in MD&A,77 while one commenter suggested eliminating this disclosure 68 See Concept Release, supra note 6. id. 70 See letters from Chamber, FedEx, CGCIV, BDO, United Health, CAQ, SIFMA, E&Y, Grant, PWC, Allstate, Davis, Fenwick, General Motors, Financial Executives International, and CFA Institute. 71 See letters from SIFMA and Allstate. 72 See letter from SIFMA. 73 See letters from RGA, CalSTRS and S. Percoco. 74 See supra note 70. 75 See Concept Release, supra note 6. 76 See letters from Chamber, FedEx, CGCIV, and Fenwick. 77 See letters from Chamber, FedEx, and CGCIV. 69 See PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 from Item 101(c) because it is typically addressed in MD&A.78 In addition to being explicitly identified as a disclosure item in Item 101(c) for all registrants, Instruction 5 to Item 303(a) states that a discussion of working capital may be appropriate in MD&A for certain registrants.79 In an effort to consolidate working capital disclosure in one location and to avoid duplicative disclosure, we do not propose to include working capital practices as a possible topic in Item 101(c) with the expectation that working capital would be discussed in a registrant’s MD&A, to the extent material. To facilitate application of our principles-based revisions to Item 101, we propose to include in Item 101(c) the non-exclusive list of disclosure topics discussed below.80 We believe that the proposed topics would likely be material to many registrants and, thus, would facilitate the disclosure of information material to an investment decision while providing flexibility to tailor disclosure to the specific circumstances of each registrant. The proposed topics would not be line-item requirements, but to the extent that a topic is material to an understanding of a registrant’s business, disclosure would be required.81 Under our proposal, the revised rule would not explicitly reference some of the disclosure requirements currently contained in Item 101(c). In addition to working capital practices, the proposed amendments would no longer list the following topics: Disclosure about new segments and dollar amount of backlog orders believed to be firm. Nevertheless, under the proposed principles-based approach, registrants still would have to provide disclosure about these topics, as well as any other topics regarding the registrants’ business, if they are material to an understanding of their business. The proposal retains Item 101(c)’s distinction between disclosure topics 78 See letter from Fenwick. 5 to Item 303(a) (‘‘For example, a discussion of working capital may be appropriate for certain manufacturing, industrial or related operations but might be inappropriate for a bank or public utility.’’). 80 We are not proposing to amend the more prescriptive alternative disclosure standards regarding business development, description of business, and other information specified under 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. 81 Similar to Item 101(a), proposed Item 101(c) refers to materiality in the introductory language of paragraphs (c)(1) and (2). While materiality is repeated in some of the listed topics that follow, this is not intended to create a second or different analysis regarding materiality for any such topic. 79 Instruction E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules for which segment disclosure should be the primary focus, and those for which the focus should be on the registrant’s business taken as a whole. The proposal clarifies, however, that, for any listed topic, disclosure is required only to the extent that it is material to an understanding of the registrant’s business taken as a whole. Similar to current Item 101(c), most of the listed disclosure topics would fall into the category for which segment disclosure would be required to the extent the topic is material to an understanding of the registrant’s business taken as a whole.82 We believe that, for the topic regarding the material effects of compliance with government regulation, including environmental regulation, and the topic regarding human capital resources, the appropriate primary focus should be with respect to the registrant’s business taken as a whole. Similar to the current rule, however, if the information elicited regarding these two topics is material to a particular segment, the registrant would additionally be required to identify that segment.83 jbell on DSK3GLQ082PROD with PROPOSALS2 1. Revenue-Generating Activities, Products and/or Services, and any Dependence on Key Products, Services, Product Families, or Customers, Including Governmental Customers While we recognize that the twelve enumerated items in Item 101(c) may not be relevant across all industries or businesses, 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, would generally be material to an investment decision. We agree with the commenter who stated 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.84 As such, we propose 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.85 82 See proposed Item 101(c)(1). proposed Item 101(c)(2). 84 See letter from E&Y. 85 See proposed Item 101(c)(1)(i). Form S–4 refers to the current version of Item 101(c)(1)(i), which pertained to a registrant’s principal products or services, but also refers to Items 101(b) and (d), which pertain, respectively, to certain financial 83 See VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 2. Status of Development Efforts for New or Enhanced Products, Trends in Market Demand and Competitive Conditions We continue to believe that disclosure regarding development efforts for new or enhanced products, and trends in market demand and competition would generally be material to an investment decision. In response to the Concept Release, several commenters suggested additional disclosure related to competitive conditions. One commenter recommended requiring disclosure of the registrant’s competitive landscape, noting that companies not only compete within their industry but also with entities external to their industry segment.86 Another commenter supported greater disclosure of a registrant’s competitive position and especially the market share of its products, competitive landscape and industry trends shaping the nature of competition.87 Rather than prescribe additional disclosures for this topic that must be provided in all circumstances, we believe that a principles-based approach that allows flexibility for registrants to disclose this information to the extent it is material to an understanding of their business would better accommodate the variety of competitive conditions that registrants may face.88 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 information about business segments and geographic areas. See paragraph (b)(3)(i) of Item 12 under Part I, Section B of Form S–4. The Commission recently eliminated Items 101(b) and (d) as business disclosure requirements because much of the disclosure was duplicative of disclosure in the registrant’s financial statements. See DUSTR Adopting Release, supra note 62, at 50168–50169. Because proposed Item 101(c)(1)(i) would continue to pertain to a registrant’s products or services, we are proposing to retain this Item 101 provision in Form S–4, but remove Items 101(b) and (d) from that Form to reflect their elimination from Regulation S–K. The same paragraph of Form S–4 also includes descriptions of disclosure items included under Items 101(b), (c)(1)(i), or (d). We are proposing to remove the descriptor that pertains to Item 101(d) (‘‘foreign and domestic operations and export sales’’), but retain the descriptor ‘‘industry segments’’ since that descriptor would continue to apply to Item 101(c)(1)(i). We are proposing to substitute the descriptor ‘‘key products or services’’ for ‘‘classes of similar products or services’’ because the proposed amendment to Item 101(c)(1)(i) would include the former but would eliminate the latter as a listed disclosure topic under Item 101(c)(1)(i). 86 See letter from CFA Institute. 87 See letter from S. Percoco. 88 See proposed Item 101(c)(1)(ii). PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 44365 importance, 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.89 As discussed in greater detail below, we propose modernizing these disclosure requirements to refocus registrants’ disclosure on all resources material to their business. We believe that this approach would elicit more informative disclosure tailored to the specific circumstances of each company or its industry. To facilitate application, we propose including (a) raw materials, and (b) patents, trademarks, licenses, franchises and concessions held, as examples of resources that may be material to a registrant’s business. a. Raw Materials Item 101(c)(1)(iii) currently requires disclosure of the sources and availability of raw materials.90 In response to the Concept Release’s solicitation of feedback,91 we received several comment letters that specifically addressed the requirement to disclose the sources and availability of raw materials.92 Two commenters recommended retaining this requirement.93 One of these commenters specified that the disclosure requirement should be retained with a materiality overlay,94 while the other commenter stated that disclosure should only be required if raw materials are difficult to obtain.95 One commenter stated that, where material, registrants generally discuss the specific sub-items in Item 101(c), including sources and availability of raw materials, in the business narrative or elsewhere, including MD&A.96 We propose retaining sources and availability of raw materials as a listed disclosure topic in Item 101(c) 97 because, while not applicable to all registrants, raw materials are fundamental to businesses that depend on them. Although some registrants include disclosure regarding raw materials elsewhere in disclosure documents (such as in MD&A), this disclosure often has a different focus.98 89 17 CFR 229.101(c)(1)(iii) and (iv). CFR 229.101(c)(1)(iii). 91 See Concept Release, supra note 6. 92 See letters from Chamber, FedEx, CGCIV, Davis, Fenwick, and NYSSCPA. 93 See letters from Fenwick and NYSSCPA. 94 See letter from Fenwick. 95 See letter from NYSSCPA. 96 See letter from Davis. 97 See proposed Item 101(c)(1)(iii)(A). 98 For example, a discussion of raw materials in a registrant’s MD&A may focus more narrowly on 90 17 E:\FR\FM\23AUP2.SGM Continued 23AUP2 44366 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules Further, our proposal to shift Item 101(c) to a more principles-based approach would help clarify that disclosure regarding sources and availability of raw materials by registrants is required only when material to their business. jbell on DSK3GLQ082PROD with PROPOSALS2 b. The Duration and Effect of all Patents, Trademarks, Licenses, Franchises, and Concessions Held Item 101(c)(1)(iv) requires disclosure of the importance, 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.99 The Concept Release solicited input on whether to maintain, expand or revise the current scope of this Item and requested comment on the competitive costs of this disclosure.100 It also sought comment on whether to limit this disclosure requirement to certain industries.101 Numerous commenters supported maintaining the current scope of Item 101(c)(1)(iv),102 while several commenters opposed expanding this Item based on competitive concerns.103 Item 101(c)(1)(iv) currently does not refer to disclosure of copyrights or trade secrets and many commenters expressed concern that requiring such disclosure would impose substantial costs and be unduly burdensome by requiring registrants to systematically identify and catalog such intellectual property.104 the effect that spending on, or budgeting for, raw materials may have on a registrant’s liquidity and capital resources, whereas Item 101(c)(1) attempts to elicit broader disclosure concerning activities involving raw materials, including identifying and procuring sources for those raw materials, that may be material to an understanding of the registrant’s business as a whole. 99 17 CFR 229.101(c)(1)(iv). 100 See Concept Release, supra note 6. 101 See id. 102 See letters from 36 Organizations with an Interest in Trade Secret Protection (Aug. 8, 2016) (‘‘36 Organizations’’), Association of American Publishers (July 21, 2016), American Intellectual Property Law Association (Aug. 9, 2016) (‘‘American IP Law Association’’), Chamber, FedEx, Intellectual Property Owners Association (July 15, 2016) (‘‘IP Owners Association’’), S. Percoco, NAM, NYSSCPA, the Software Association, the Entertainment Software Association and the Software Information Industry Association (July 21, 2016) (‘‘Software Associations’’), Financial Services Roundtable (July 21, 2016), General Motors, and Financial Executives International. 103 See letters from 36 Organizations (focusing only on trade secrets), American IP Law Association; Chamber, FedEx, Financial Services Roundtable (focusing only on trade secrets), IP Owners Association, NAM, Association of American Publishers (focusing only on copyrights), General Motors, Financial Executives International, and Software Associations. 104 See, e.g., letters from 36 Organizations, American IP Law Association, Chamber, FedEx, IP Owners Association, NAM, and Association of American Publishers. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 Further, several commenters suggested that because trade secret protection is contingent on the owner taking reasonable measures to keep the information secret, any revision to this Item to require disclosure of ‘‘intellectual property’’ would, by definition, include trade secrets and endanger these assets.105 In addition, some commenters opposed establishing different intellectual property requirements by industry 106 and some commenters supported maintaining the current materiality threshold for disclosure.107 Conversely, a number of commenters recommended generally expanding the scope of Item 101(c)(1)(iv).108 In this regard, some commenters stated that a more complete record of a public company’s intellectual property is useful to the public, shareholders, researchers, and the financial markets generally.109 One of these commenters recommended expanding the requirement to include detailed intellectual property information for both material and immaterial intellectual property with the caveat that immaterial intellectual property should be required only if the information is readily available to report and within the knowledge of the company.110 Another commenter, in recommending expansion of this requirement, noted that intellectual property assets are a major driver of value in corporations, and asserted that more open disclosure would allow shareholders to better assess the value of corporate intellectual property assets and monitor directors’ stewardship of these assets.111 Another commenter recommended including copyrights under this item and requiring detailed tabular disclosure by asset type.112 This commenter also opposed establishing different disclosure requirements by industry.113 A broad range of industries directly and indirectly benefit from intellectual 105 See letters from 36 Organizations, American IP Law Association, Chamber, FedEx, Financial Services Roundtable, IP Owners Association, and NAM. 106 See letters from IP Owners Association, NYSSCPA, Software Associations, and American IP Law Association. 107 See letters from American IP Law Association, IP Owners Association, NAM, ACC and NYSSCPA. 108 See letters from Black Stone IP, LLC (May 19, 2016), IIRC, Colleen V. Chien et al. (July 22, 2016) (‘‘IP Professors’’), Prof. Denoncourt (July 31, 2016), and CFA Institute. 109 See letters from IP Professors and Prof. Denoncourt. 110 See letter from IP Professors. 111 See letter from Prof. Denoncourt. 112 See letter from CFA Institute. 113 See id. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 property 114 and intellectual property has become increasingly important to business performance.115 Certain industries produce or use significant amounts of intellectual property or rely more heavily on these rights.116 Accordingly, some registrants provide detailed disclosure in response to Item 101(c)(1)(iv), although disclosure varies among registrants and across industries. In the biotechnology and pharmaceutical industries, registrants that provide detailed patent disclosure often disclose the jurisdiction in which the patent was filed, year of expiration, type of patent (e.g., composition of matter, method of use, method of delivery or method of manufacturing), products or technologies to which the patent relates and how the patent was acquired (e.g., licensed from another entity or owned and filed by the registrant). Some registrants in these industries aggregate patent disclosure by groups of patents, potentially making disclosure about individual material patents difficult to discern. As registrants in the biotechnology and pharmaceutical industries regularly sell one or more patented products that generate substantial revenue, disclosure of ‘‘patent cliffs,’’ 117 which may result 114 See Economics and Statistics Administration and United States Patent and Trademark Office, Intellectual Property and the U.S. Economy: Industries in Focus (Mar. 2012) at iv, available at https://www.uspto.gov/sites/default/files/news/ publications/IP_Report_March_2012.pdf (‘‘Intellectual Property Report’’). 115 See, e.g., Kelvin W. Willoughby, What impact does intellectual property have on the business performance of technology firms?, Int. J. Intellectual Property Management, Vol. 6, No. 4 (2013). 116 See Intellectual Property Report, supra note 114. This report identifies seventy-five industries as ‘‘IP-intensive.’’ In this report, patents, trademarks and copyrights were the categories of intellectual property assessed. The methodology for designating each of these subcategories as ‘‘IP-intensive’’ is outlined further in this report. For patent intensive industries, the report utilized the North American Industry Classification System (NAICS) codes and identified, as the four most patent-intensive industries, those industries classified in computer and electronic product manufacturing (NAICS 334). This three-digit NAICS industry includes computer and peripheral equipment; communications equipment; other computer and electronic products; semiconductor and other electronic components; and navigational, measuring, electro-medical, and control instruments. 117 The term ‘‘patent cliff’’ as used in the biotechnology and pharmaceutical industry refers to a future loss of patent protection and consequential loss of revenue. These potential future losses are known to registrants far in advance of their onset. When they occur, they often precipitate material adverse financial effects. See, e.g., Andrew Jack, Pharma tries to avoid falling off ‘patent cliff,’ Financial Times, May 6, 2012 and Cliffhanger, Economist, Dec. 3, 2011. See also Ed Silverman, Big Pharma Faces Some Big Patent Losses, but Pipelines are Improving, Wall St. J.: L. Blog, available at https://blogs.wsj.com/pharmalot/ 2015/02/09/big-pharma-faces-some-big-patentlosses-but-pipelines-are-improving/. E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 in material adverse financial effects, may be required in the risk factors section or MD&A.118 In the information technologies and services industry, registrants protect their intellectual property through the use of patents, trademarks, copyrights, trade secrets, licenses, and confidentiality agreements.119 Registrants with large portfolios of intellectual property often disclose that their products, services, and technologies are not dependent on any specific patent, trademark, copyright, trade secret, or license. As a result, these registrants often provide only high-level discussions of their intellectual property portfolios, which include general statements of a registrant’s development, use, and protection of its intellectual property. Registrants with smaller intellectual property portfolios tend to provide slightly more detailed discussions, including, for example, disclosure of the total number of issued patents, a range of years during which those patents expire and the total number of pending patent applications. In general, registrants in the information technologies and services industry use copyrights to protect against the unauthorized copying of software programs 120 and trade secrets to protect proprietary and confidential information that derives its value from continued secrecy.121 Since Item 101(c)(1)(iv) does not require disclosure about copyrights or trade secrets, registrants currently make disclosure about such matters voluntarily. We propose to retain as a listed disclosure topic the importance, 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.122 In response to concerns expressed by commenters on the Concept Release, however, we are 118 See generally ‘‘Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ Release No. 33–8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)], available at https:// www.sec.gov/rules/interp/33-8350.htm. 119 See Bruce Abramson, Promoting Innovation in the Software Industry: A First Principles Approach to Intellectual Property Reform, 8 B.U. J. Sci. & Tech. L. 75 (2002) (discussing the software industry’s use of intellectual property law). 120 See Dennis S. Karjala, Copyright Protection of Operating Software, Copyright Misuse, and Antitrust, 9 Cornell J.L. & Pub. Pol’y 161, 172 (1999) (discussing the dependence of software technology companies on copyright). 121 See Raymond T. Nimmer & Patricia Ann Krauthaus, Software Copyright: Sliding Scales and Abstracted Expression, 32 Hous. L. Rev. 317, 325 (1995) (distinguishing among the software industry’s use of trade secret law, patent law and copyright law). 122 See proposed Item 101(c)(1)(iii)(B). VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 not proposing to expand this topic to include copyrights and trade secrets. In addition to competitive concerns, commenters noted 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.123 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 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.124 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.125 At any given time in the performance of a government contract, an estimate of its profitability is often 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.126 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 123 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). But see also letters from International Integrated Reporting Council (July 20, 2016) and CFA Institute (Oct. 6, 2016) (supporting the inclusion of copyrights under Item 101(c)). 124 17 CFR 229.101(c)(1)(ix). 125 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)]. 126 See id. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 44367 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 are proposing to retain renegotiation or termination of government contracts as a listed disclosure topic 127 because we continue to believe that, when material to a business, disclosure of this information is important for investors. 5. The Extent to Which the Business Is or May Be Seasonal Item 101(c)(1)(v) requires disclosure of the extent to which the business of the segment is or may be seasonal to the extent material to an understanding of the registrant’s business taken as a whole.128 The Commission recently considered whether to delete Item 101(c)(1)(v).129 While the Commission initially proposed deleting this Item,130 noting that both Regulation S–K 131 and U.S. GAAP 132 require disclosures about seasonality in interim periods,133 the Commission ultimately decided 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,134 and retain Item 101(c)(1)(v). The Commission based its decision to retain this Item on a concern about the potential loss of information in the fourth quarter about the extent to which the business of a registrant or its segment(s) is or may be seasonal 127 See proposed Item 101(c)(1)(iv). CFR 229.101(c)(1)(v). 129 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. We refer to these letters throughout as ‘‘DUSTR’’ letters. 130 See DUSTR Proposing Release, supra note 129. 131 Instruction 5 to Item 303(b) of Regulation S– K [17 CFR 229.303(b)] required a discussion of any seasonal aspects of a registrant’s business where the effect is material. 132 ASC 270–10–45–11. 133 See DUSTR Proposing Release, supra note 129. 134 The Commission decided to delete Instruction 5 to Item 303(b) because of its belief that 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 62, at 50169. 128 17 E:\FR\FM\23AUP2.SGM 23AUP2 44368 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules because U.S. GAAP may not elicit this disclosure.135 In light of the Commission’s recent evaluation of this disclosure item, we propose including as a disclosure topic in Item 101(c) the extent to which the business is or may be seasonal.136 6. Compliance With Material Government Regulations, Including Environmental Regulations 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.137 The Concept Release solicited input on whether to increase or reduce the disclosure required by this Item and whether this disclosure is important to investors.138 It also sought comment on whether to require this disclosure in a different format.139 Some commenters supported retaining Item 101(c)(1)(xii).140 A few of these commenters stated that this disclosure would increase in importance given trends toward an enhanced regulatory approach to environmental protection.141 Several commenters supported retaining the Item but opposed expanding it to include additional requirements.142 Other commenters supported expanding this Item.143 A few of these commenters supported requiring more detailed disclosure of environmental fines, violations, and litigation (e.g., whether these are rare or recurring).144 One commenter recommended including this requirement in a broader category of government regulations.145 jbell on DSK3GLQ082PROD with PROPOSALS2 135 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. 136 See proposed Item 101(c)(1)(v). 137 17 CFR 229.101(c)(1)(xii). 138 See Concept Release, supra note 6. 139 See id. 140 See letters from PRI, the Carbon Tracker Initiative (July 20, 2016), S. Percoco, Chamber, FedEx, CGCIV, NIRI, and CFA Institute. 141 See, e.g., letters from PRI and the Carbon Tracker Initiative. 142 See letters from Chamber, FedEx, CGCIV, and NIRI. 143 See letters from CalPERS, DHC Consulting, Impax Asset Management Limited (July 19, 2016) (‘‘Impax’’), Good Jobs First, Domini Social, and GRI. 144 See letters from Impax, Domini Social and Good Jobs First. 145 See letter from Fenwick. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 Pursuant to the National Environmental Policy Act of 1969 (‘‘NEPA’’),146 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).147 Subsequent litigation 148 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.149 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.150 While 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). The Concept Release sought comment on whether to require registrants to disclose government regulations material to their business given that many registrants already voluntarily provide such information.151 In addition, it sought input on whether to require disclosure of foreign regulations applicable to the operation of the 146 Public Law 91–190, 42 U.S.C. 4321–4347 (Jan. 1, 1970) (‘‘NEPA’’). 147 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’’). 148 See Natural Resources Defense Council, Inc. v. SEC, 389 F. Supp. 689 (D.D.C. 1974); and Natural Resources Defense Council, Inc. v. SEC, 606 F.2d 1031 (DC 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). 149 See Disclosure of Environmental and Other Socially Significant Matters, Release No. 33–5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 18, 1975)]. 150 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. 151 See Concept Release, supra note 6. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 registrant’s business.152 A few commenters supported a specific requirement to disclose government regulations 153 while one commenter opposed such a requirement, stating that it would not provide significant additional information.154 Some commenters supported requiring disclosure of foreign regulatory risks.155 Two commenters specified that this requirement should be limited to foreign regulations material to the registrant’s business.156 One commenter opposed a requirement to discuss foreign regulations that affect a registrant’s business and, instead, recommended revising Item 103 to require disclosure of any foreign tax audits or actions with negative findings, stating this would be less costly and time consuming than a requirement to disclose foreign regulations.157 Although not required by Item 101(c), many registrants currently discuss government regulations relevant to their business, often in the form of a list. Healthcare and insurance providers regularly disclose their collection, use and protection of individuallyidentifiable information and compliance with the Health Insurance Portability and Accountability Act of 1996,158 as well as the impact of the Patient Protection and Affordable Care Act 159 on their business. Biotechnology or medical device companies often disclose the status of and process for FDA approval of significant new drugs or medical devices. Public utilities typically discuss regulation by various Federal, state, and local authorities and include information about state ratemaking procedures, which determine the rates utilities charge and the return on invested capital. Registrants in the financial services industry regularly describe Federal and state regulation as well as supervision by the Federal Reserve Board, while registrants with a material amount of U.S. government contracts disclose the laws and regulations for government contracts. Registrants with tax strategies involving foreign jurisdictions typically disclose that they are subject to income taxes in both the U.S. and numerous foreign jurisdictions, and that future changes to U.S. and non-U.S. tax law could adversely affect their anticipated financial position and results. Some 152 See id. letters from Fenwick and S. Percoco. 154 See letter from NYSSCPA. 155 See letters from IAC, NYSSCPA, and SIFMA. 156 See letters from NYSSCPA and SIFMA. 157 See letter from E. Bean. 158 Public Law 104–191, 110 Stat. 1936 (1996). 159 Public Law 111–148, 124 Stat. 119 (2010). 153 See E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 registrants disclose the impact of tax treaties between the U.S. and one or more foreign jurisdictions on their business. Consistent with the current practice of many registrants, as observed by the staff in its review of filings, we propose including the material effects of compliance with material government regulations, not just environmental laws, as a listed disclosure topic in Item 101(c).160 This disclosure topic would focus on the material effects that compliance with material governmental regulations, both foreign and domestic, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries. We believe that this more principles-based approach would help provide investors with the information material to an investment decision about a registrant’s compliance with the government regulations that materially affect the registrant’s business so that investors may achieve a more complete understanding of the registrant’s business. This approach would also enable each registrant to tailor its disclosure regarding its compliance with those governmental regulations that are of particular importance to the registrant. Finally, the proposed approach would codify what has become common practice regarding government regulation disclosure. While we propose to retain the requirement that a registrant disclose material estimated capital expenditures for environmental control facilities for the current fiscal year and any other subsequent period that the registrant deems material,161 we are not proposing to require the disclosure of additional specific expenditures related to environmental compliance, as some commenters have suggested.162 We 160 See proposed Item 101(c)(2)(i). We note that, despite the repetition of materiality within this topic in relation to both effects of compliance and government regulations, we do not foresee any circumstances whereby a registrant could determine there are material effects from compliance with a government regulation, but that the government regulation itself is not material to the registrant’s business taken as a whole. 161 Current Item 101(c)(i)(xii) requires the disclosure of material estimated capital expenditures for environmental control facilities for the remainder of a registrant’s current fiscal year and its succeeding fiscal year as well as for such further periods as the registrant may deem material. In order to simplify the disclosure, and in keeping with our more principles-based approach, we are proposing to revise Item 101(c) to require such environmental control facilities expenditures disclosure for the registrant’s current fiscal year and any other subsequent period deemed material by the registrant. See proposed Item 101(c)(2)(i). 162 See, e.g., letters from DHC Consulting, Domini Social, and Impax. Our proposed approach is consistent with the views of several commenters VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 believe that a more principles-based approach would permit a registrant to tailor its disclosure by focusing on the effects of environmental compliance that are material to its particular business. This proposed approach would also benefit investors by helping to reduce or eliminate boilerplate or other disclosure concerning the effects of environmental compliance that may not be material to an understanding of the business of a particular registrant. 7. Human Capital Disclosure Item 101(c)(1)(xiii) currently requires disclosure of the number of persons employed by the registrant.163 The Concept Release solicited input on this disclosure requirement; 164 in particular, we requested feedback on: • Whether this disclosure is important to investors; • Whether to require or permit registrants to provide a range of its number of employees or independent contractors; • Whether disclosure regarding anticipated material changes in the number of employees would be useful to investors; and • Whether to require registrants to provide disclosure distinguishing among their total employees such as by full-time and part-time or seasonal employees; employees and independent contractors; or domestic or foreign employees.165 Many commenters recommended retaining and expanding the requirement to disclose the number of persons employed by the registrant,166 that supported the retention of Item 101(c)’s environmental compliance disclosure provision while opposing its expansion. See supra note 142. 163 17 CFR 229.101(c)(1)(xiii). 164 In addition, there has been congressional interest in the topic of modernizing human capital disclosures by registrants. See, e.g., letter from Sen. Mark R. Warner (July 19, 2018) (‘‘Sen. Warner’’). 165 See Concept Release, supra note 6. 166 See letters from RGA, E. Bean (July 6, 2016), CII, Railpen, NYSC, Interfaith Center on Corporate Responsibility (July 14, 2016) (‘‘ICCR’’), US SIF Foundation (July 14, 2016) (‘‘US SIF’’), Dana Investment Advisors (July 15, 2016) (‘‘Dana Investment’’), Douglas Hileman Consulting LLC (July 15, 2016) (‘‘DHC Consulting’’), Sisters of Charity of Saint Elizabeth (July 18, 2016) (‘‘Sisters of Charity’’), Christian Church Foundation (July 18, 2016) (‘‘CCF’’), Park Foundation (July 19, 2016) (‘‘Park’’), OIP Trust (July 19, 2016) (‘‘OIP’’), Priests of the Sacred Heart (July 20, 2016) (‘‘Sacred Heart’’), Sister Schools of St. Francis (July 20, 2016) (‘‘S.S. St. Francis’’), Friends Fiduciary Corporation (July 20, 2016) (‘‘Friends’’), LGIM, Everence Financial and the Praxis Mutual Funds (July 20, 2016) (‘‘Everence’’), Sister Schools of Notre Dame (July 21, 2016) (‘‘SSND’’), Provincial of the School Sisters of St. Francis of St. Joseph Convent (July 20, 2016) (‘‘SSSF-Wisconsin’’), As You Sow (July 21, 2016), CAQ, GRI (July 21, 2016), Domini Social, E&Y, CalSTRS, Hermes Investment Management (July 21, 2016), NYC Comptroller, Good Jobs First (July 21, 2016), Maryland Bar Securities Committee, Tri- PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 44369 with some asserting that disclosure of the exact number of employees would help investors understand the risks of potential material labor and human rights violations and that, for contractors or subcontractors, disclosing a range of these workers would be acceptable if sufficiently narrow and accompanied by disclosure explaining why the exact number is unavailable.167 Conversely, a number of commenters questioned the utility of requiring registrants to disclose the number of persons employed by the registrant.168 Several of these commenters opposed expanding the requirement,169 while another commenter stated that this disclosure is typically immaterial and any change in the number of employees that materially affects the registrant’s results of operations would be disclosed in MD&A.170 With respect to whether anticipated material changes in the number of employees would be useful to investors, several commenters supported disclosure of employee turnover.171 Numerous commenters further recommended requiring registrants to distinguish among their total employees.172 Most of these commenters recommended requiring this disclosure for both registrants and their suppliers, and specified inclusion State Coalition for Responsible Investment (July 21, 2016) (‘‘TSCRI’’), Addenda Capital (July 21, 2016), AFSCME, AFL–CIO, Bloomberg (July 21, 2016), Oxfam America (July 21, 2016), Presbyterian Church U.S.A. (July 21, 2016) (‘‘PC USA’’), Allstate, Cornerstone, Christian Brothers Investment Services (July 21, 2016) (‘‘CBIS’’), S. Percoco, Responsible Sourcing Network (July 21, 2016) and CalPERS. 167 See letters from US SIF and US SIF Foundation (July 14, 2016) (‘‘US SIF’’), ICCR, Dana Investment, Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, PC USA and CBIS. 168 See letters from Chamber, FedEx, CGCIV, and Fenwick. 169 See letters from Chamber, FedEx, and CGCIV. 170 See letter from Fenwick. Another commenter stated that this information is immaterial, does not provide information about the size or scope of the business, and does not provide any clarity to the overall strategy of the company. See letter from United Health. Further, one commenter asserted that disclosures that comply with the current prescriptive requirement may not provide investors with the most appropriate information. 171 See letters from DHC Consulting, LGIM, Railpen, CalPERS, AFL–CIO, NYC Comptroller, AFSCME, CAQ, Domini Social, E&Y, Hermes Investment Management, and Cornerstone. 172 See letters from ICCR, Dana Investment, DHC Consulting, Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, PC USA, CBIS, GRI, US SIF, Railpen, CalPERS, AFL– CIO, CAQ, Domini Social, CalSTRS, Good Jobs First, Maryland Bar Securities Committee, Bloomberg, and NYC Comptroller. E:\FR\FM\23AUP2.SGM 23AUP2 44370 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 of migrant, contract, or temporary workers.173 The Concept Release also solicited feedback on additional line-item disclosure requirements about a registrant’s business that would improve the quality and consistency of disclosure, and specifically sought input on whether to require additional information about a registrant’s employees or employment practices.174 A number of commenters advocated for greater human capital disclosure,175 with a variety of commenters recommending various specific disclosure topics, including: • Worker recruitment, employment practices, and hiring practices;176 • Employee benefits and grievance mechanisms; 177 • ’’Employee engagement’’ or investment in employee training; 178 • Workplace health and safety; 179 • Strategies and goals related to human capital management and legal or regulatory proceedings related to employee management; 180 • Whether employees are covered by collective bargaining agreements; 181 and • Employee compensation or incentive structures.182 We also received a rulemaking petition requesting that the Commission adopt new rules, or amend existing 173 See letters from ICCR, Dana Investment, DHC Consulting, Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, PC USA, CBIS, GRI, and Good Jobs First. 174 See Concept Release, supra note 6. 175 See, e.g., letters from M. Ferguson (July 7, 2016), Norges Bank Investment Management (July 15, 2016), P. Linzmeyer (July 19, 2016), LGIM, Railpen, Hermes Investment Management, NYC Comptroller, Addenda Capital, AFSCME, Working IDEAL (July 21, 2016), AFL–CIO, National Partnership for Women & Families (Aug. 8, 2016), and Rockefeller & Co., Inc. (July 21, 2016), and Sen. Warner. 176 See letters from ICCR, Dana Investment, Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, Everence, SSND, SSSFWisconsin, As You Sow, TSCRI, CalPERS, PC USA, CBIS, and Domini Social. 177 See letters from ICCR, Dana Investment, Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, Everence, SSND, SSSFWisconsin, As You Sow, TSCRI, PC USA, and CBIS. 178 See letters from LGIM, Railpen, CalPERS, AFL–CIO, NYC Comptroller, AFSCME, Addenda Capital and Hermes Investment Management. See also letter from Joseph V. Carcello, Chair, Investor as Owner Subcommittee, on behalf of Subcommittee members, of the SEC’s Investor Advisory Committee (November 22, 2016) (in response to FAST Act—SEC Required Study on Modernization and Simplification of Regulation S– K). 179 See letters from LGIM, Railpen, CalPERS, NYC Comptroller, AFSCME, AFL–CIO, and US SIF. 180 See letters from AFL–CIO and Domini Social. 181 See letter from Good Jobs First. 182 See letters from NYC Comptroller, AFL–CIO, CalPERS, and Domini Social. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 rules, to require registrants to disclose information about their human capital management policies, practices and performance (the ‘‘Human Capital Rulemaking Petition’’).183 Many of the comment letters received in support of the Human Capital Rulemaking Petition asserted the importance of human capital management in assessing the potential value and performance of a company over the long term.184 Further, a number of commenters asserted that companies with poor management of human capital may face operational, legal, and reputational risks while, in contrast, companies with strong human capital management may develop a competitive advantage.185 While the Human Capital Rulemaking Petition did not include specific recommendations for disclosure requirements related to human capital management, it included categories of information that it characterized as fundamental to furthering investors’ understanding of how well a company is managing its human capital.186 Item 101(c)(1)(xiii) dates back to a time when companies relied significantly on plant, property, and equipment to drive value. At that time, a prescriptive requirement to disclose the number of employees may have been an effective means to elicit information material to an investment decision. Today, intangible assets represent an essential resource for many companies.187 Because human capital 183 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), available at https:// www.sec.gov/rules/petitions/2017/petn4-711.pdf and related comments available at https:// www.sec.gov/comments/4-711/4-711.htm. We refer to these letters throughout as ‘‘Human Capital Rulemaking Petition’’ letters. 184 See, e.g., letters from British Columbia Municipal Pension Board of Trustees (Sept. 29, 2017) [Human Capital Rulemaking Petition letter], CalPERS and CalSTRS (July 10, 2017) (‘‘CalPERS and CalSTRS 1’’) [Human Capital Rulemaking Petition letter], Center for Safety and Health Sustainability (June 15, 2018) (‘‘Center for Safety’’) [Human Capital Rulemaking Petition letter], David F. Larcker (Dec. 15, 2017) [Human Capital Rulemaking Petition letter], League of Allies (Apr. 25, 2018) [Human Capital Rulemaking Petition letter], and AFL–CIO (Sept. 22, 2017) [Human Capital Rulemaking Petition letter]. 185 See letters from Australian Council of Superannuation Investors (Nov. 20, 2017) [Human Capital Rulemaking Petition letter], British Columbia Municipal Pension Board of Trustees, CalPERS and CalSTRS 1, and Center for Safety. 186 See Human Capital Rulemaking Petition, supra note 183 (suggesting that the key categories of information are: Workforce demographics; workforce stability; workforce composition; workforce skills and capabilities; workforce culture and empowerment; workforce health and safety; workforce productivity; human rights commitments and their implementation; workforce compensation and incentives). 187 See infra note 279. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 may represent an important resource and driver of performance for certain companies, and as part of our efforts to modernize disclosure, we propose to amend Item 101(c) to refocus registrants’ human capital resources disclosures.188 Specifically, we propose replacing the current requirement to disclose the number of employees with a requirement to disclose 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. We recognize that the exact measures or objectives included in a registrant’s human capital resource disclosure may change over time and may depend on the industry. The proposed amendment provides nonexclusive 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. In assessing the best way to approach disclosure regarding human capital, we were mindful that each industry, and even each company within a specific industry, has its own human capital considerations, and that those considerations may evolve over time. In light of this fact, and with the principle of materiality in mind, it is our view that prescribing fixed, specific line item disclosures in this area for all registrants would not result in the most meaningful disclosure.189 Instead, we believe that investors would be better served by understanding how each company looks at its human capital and, in particular, where management focuses its attention in this space. The intent of the proposed requirement is to elicit, to the extent material to an understanding of the registrant’s business, disclosures regarding human capital that allow investors to better understand and evaluate this company resource and to 188 See proposed Item 101(c)(2)(ii). Investor Advisory Committee recently recommended that the SEC take measures to improve the disclosure of a registrant’s human capital management, and suggested that ‘‘any 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 (March 28, 2019), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/human-capital-disclosurerecommendation.pdf. 189 The E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 see through the eyes of management how this resource is managed. Request for Comment 12. Should we shift to a more principles-based approach for Item 101(c), as proposed? Would registrants find it difficult to apply the principlesbased requirements? 13. Would the proposed principlesbased requirements elicit information that is material to an investment decision? If not, how might Item 101(c) be further improved? Are there any additional disclosure topics that we should include in Item 101(c) to facilitate disclosure? Alternatively, should we exclude any of our proposed disclosure topics? 14. Should we instead require disclosure of any or all of the topics addressed in our proposed examples? If so, which topics? Should we require other types of business information? If so, what information? 15. Should we retain Item 101(c)’s distinction between disclosure topics for which segment disclosure should be the primary focus, and those for which the focus should be on the registrant’s business taken as a whole, as proposed? If so, is our allocation of the listed disclosure topics into the two categories appropriate? 16. We are proposing to amend Item 101(c) to include as a listed disclosure topic the status of development efforts for new or enhanced products, trends in market demand and competitive conditions. Would the disclosure elicited in response to this amendment overlap with the disclosure provided in response to our proposed amendment to Item 101(a) to include material changes to business strategy as a disclosure topic? If so, should business strategy changes be included as a listed disclosure topic in Item 101(c) instead of Item 101(a)? 17. Currently, the duration and effect of copyright and trade secret protection is not included within the scope of Item 101(c) disclosure. Should we include it as a listed disclosure topic that could be provided? 18. Is backlog typically discussed in MD&A or is it better suited for disclosure under Item 101(c) to the extent material? Similarly, is working capital typically sufficiently disclosed in MD&A or is it better addressed under Item 101(c)? 19. Should the extent to which the business is or may be seasonal be included as a listed disclosure topic, as proposed? Alternatively, should we require this disclosure in all circumstances? We note that fourth quarter disclosure about the extent to VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 which the business of a registrant or its segment(s) is or may be seasonal may not be elicited by U.S. GAAP. We further note that there is no longer a separate seasonality instruction to MD&A. Do these considerations support the continued inclusion of seasonal aspects of a registrant’s business, to the extent material to the understanding of a registrant’s business, as a listed disclosure topic? 20. Should we include as a listed disclosure topic the material effects of compliance with material government regulations, as proposed, or should we focus more narrowly on compliance with environmental regulations, as currently required under Item 101(c)? Would the proposed more principlesbased approach to governmental regulatory compliance disclosure elicit the appropriate level of disclosure about environmental and foreign regulatory risks? If not, are there more specific disclosures that we should require? Should we continue to include material estimated capital expenditures for environmental control facilities as a disclosure topic under Item 101(c)? 21. Should disclosure regarding human capital resources, including any material human capital measures or objectives that management focuses on in managing the business, be included under Item 101(c) as a listed disclosure topic, as proposed? Should we define human capital? If so, how? 22. With respect to human capital resource disclosure, should we provide non-exclusive examples of the types of measures or objectives that management may focus on in managing the business, such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel, as proposed? Would providing specific examples potentially result in disclosure that is immaterial and not tailored to a registrant’s specific business? Would not including such examples result in a failure to elicit information that is material and in some cases comparable across different issuers? 23. With respect to human capital resource disclosure, should we include other non-exclusive examples of measures or objectives that may be material, such as the number and types of employees, including the number of full-time, part-time, seasonal and temporary workers, to the extent disclosure of such information would be material to an understanding of the registrant’s business? Could other examples include, depending on the nature of the registrant’s business and workforce: Measures with respect to the PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 44371 stability of the workforce, such as voluntary and involuntary turnover rates; measures regarding average hours of training per employee per year; information regarding human capital trends, such as competitive conditions and internal rates of hiring and promotion; measures regarding worker productivity; and the progress that management has made with respect to any objectives it has set regarding its human capital resources? Would providing specific examples potentially result in disclosure that is immaterial and not tailored to a registrant’s specific business? Would not including such examples result in a failure to elicit information that is material and in some cases comparable across different issuers? 24. Should we retain an explicit requirement for registrants to disclose the number of their employees? Alternatively, should we permit registrants to disclose a range of the number of its employees and/or a range for certain types of employees? 25. Foreign private issuers that file registration statements on Forms F–1, F–3, and F–4 are not subject to Item 101 and instead must meet the business disclosure requirements of Form 20–F. Should we amend Form 20–F to require the disclosure of human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent material to an understanding of the registrant’s business? Would such disclosure present a significant challenge to foreign private issuers to the extent that it is not required in other jurisdictions? Are there other proposed Item 101 disclosure topics that we should require in Form 20–F? 26. The Commission revised Form 20–F in 1999 to conform in large part to the international disclosure standards endorsed by the International Organization of Securities Commissions (‘‘IOSCO’’) for the non-financial statement portions of a disclosure document, which have served as the basis for the disclosure requirements in several foreign jurisdictions.190 One of the objectives of the IOSCO standards was to facilitate the cross-border flow of securities and capital by promoting the use of a single disclosure document that would be accepted in multiple jurisdictions.191 If we revise Form 20–F to include any of the proposed Item 101 amendments, would such revision reduce the ability of foreign private 190 See International Disclosure Standards, Release No. 33–7745 (September 28, 1999) [64 FR 53900 (Oct. 5, 1999)]. 191 See id. at 53901. E:\FR\FM\23AUP2.SGM 23AUP2 44372 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 issuers to use a single document in multiple jurisdictions? 27. The disclosure requirements regarding a foreign private issuer’s business under Form 20–F are largely prescriptive. Would amending Form 20– F to make the business disclosure more principles-based represent a more significant change, or impose a greater challenge, for foreign private issuer registrants than the proposed Item 101 amendments would for domestic registrants? Would the benefits of making Form 20–F more principlesbased nevertheless justify such an amendment? 28. Much of the disclosure required under Item 101(h) for smaller reporting companies is prescriptive. Should we retain this prescriptive approach or adopt a more principles-based approach, similar to the proposed amendments to Items 101(a) and (c), under Item 101(h)? Would smaller reporting companies find it difficult to apply a principles-based approach? Should we consider changes to any of the listed disclosure items in Item 101(h)(1) through (6)? 29. We are proposing to amend Form S–4 to conform it to changes made to Item 101 pursuant to the DUSTR Adopting Release as well as to the proposed revisions to Item 101(c) discussed above.192 Are the proposed revisions to Form S–4 appropriate? 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.193 Item 103 also requires disclosure of the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto and a description of the factual basis alleged to underlie the proceeding and the relief sought.194 Similar information is to be included for such proceedings known to be contemplated by governmental authorities.195 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 1933.196 In 1935, the 192 See supra note 85. CFR 229.103. 194 See id. 195 See id. 196 See Form A–1, Item 17, adopted in Release No. 33–5 (July 6, 1933) [not published in the Federal Register]. 193 17 VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 Commission included in Form A–2 a requirement for a brief description of material, pending legal proceedings and proceedings by governmental authorities, where such proceedings depart from the ordinary routine litigation incidental to the kind of business conducted by the registrant or its subsidiaries.197 The requirement was later expanded in Form S–1 198 to include: (1) A requirement to identify the court or agency, the date instituted, and the names of the principal parties; (2) 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; and (3) an exemption for disclosure of proceedings involving claims of less than 15 percent of the registrant’s consolidated current assets.199 As discussed in greater detail below, in connection with NEPA,200 the legal proceedings disclosure requirement was expanded to require additional disclosure about environmental matters.201 At the same time a requirement to disclose the factual basis of proceedings and the nature of relief sought was added, and the disclosure threshold was reduced from 15 percent to 10 percent.202 In 1978, the requirement was also moved from the forms to Item 5 of Regulation S–K.203 In the DUSTR Proposing Release, the Commission solicited comments about whether to retain, modify, eliminate, or refer the Item 103 disclosure requirements to the Financial Accounting Standards Board (‘‘FASB’’) for potential incorporation into U.S. GAAP.204 Many commenters opposed the integration of Item 103 into U.S. 197 See Form A–2, Item 40, adopted in Release No. 33–276 (Jan. 14, 1935) [not published in the Federal Register]. 198 17 CFR 239.11. 199 See Application for Registration of Securities, Release No. 33–3584 (Oct. 21, 1955) [20 FR 8284]. See also Forms for Registration Statements; Notice of Proposed Rulemaking, Release No. 33–3540 (Apr. 26, 1955) [20 FR 2965]. 200 See NEPA, supra note 146. 201 See Environmental Disclosure Adopting Release, supra note 147. 202 See id. 203 See Integrated Reporting Requirements: Directors and Officers, Management Remuneration, Legal Proceedings, Principal Security Holders and Security Holdings of Management, Release No. 33– 5949 (July 28, 1978) [43 FR 34402]. 204 See DUSTR Proposing Release, supra note 129 at 51633. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 GAAP.205 A number of commenters 206 stated that the objectives of Item 103 and U.S. GAAP differ,207 and some of these commenters 208 indicated that a better articulation of objectives may be warranted. Commenters further expressed concern that the integration could lead to increased disclosure of immaterial items and may eliminate the safe-harbor protections currently afforded to forward-looking statements related to legal proceedings under Regulation S–K.209 Some commenters recommended the deletion of Item 103 altogether or, at a minimum, some of the disclosure requirements contained therein.210 For example, one of these commenters asserted that U.S. GAAP, together with Items 303 and the former 503(c) (now Item 105) of Regulation S–K, elicits the appropriate level of disclosure of material legal proceedings to inform investment and voting decisions of a reasonable investor.211 In response to concerns expressed by commenters, the Commission decided to retain the disclosure requirements in Item 103 without amendment and without referral to the FASB for potential incorporation into U.S. GAAP, indicating that further consideration was warranted with respect to the implications of potential changes to these requirements.212 In light of 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 are proposing the following amendments.213 205 See, e.g., letters from Center for Audit Quality (Oct. 3, 2016) (‘‘CAQ 1’’) [DUSTR letter], Corporate Governance Coalition for Investor Value (Oct. 27, 2016) (‘‘CGCIV 1’’) [DUSTR letter], Davis Polk & Wardwell LLP (Nov. 2, 2016) (‘‘Davis 1’’) [DUSTR letter], FedEx Corporation (Nov. 2, 2016) (‘‘FedEx 1’’) [DUSTR letter], Shearman & Sterling LLP (Dec. 1, 2016) (‘‘Shearman 1’’) [DUSTR letter], and U.S. Chamber of Commerce (Oct. 27, 2016) (‘‘Chamber 1’’) [DUSTR letter]. 206 See, e.g., letters from CAQ 1 and NAREIT (Oct. 28, 2016) (‘‘NAREIT 1’’) [DUSTR letter]. 207 Item 103 is intended to provide a description of material pending legal proceedings, while U.S. GAAP is designed to provide information consistent with the accounting model for loss contingencies. 208 See, e.g., letters from CAQ 1 and Davis 1. 209 See letters from CGCIV 1, Davis 1, FedEx 1, NAREIT 1, Shearman 1, and Chamber 1. 210 See letters from Davis 1, Edison Electric Institute and American Gas Association Accounting Advisory Council (Nov. 2, 2016) (‘‘EEI and AGA 1’’) [DUSTR letter] and Grant Thornton LLP (Nov. 1, 2016) [DUSTR letter]. 211 See letter from Davis 1. 212 See DUSTR Adopting Release, supra note 62. 213 In addition to the proposed amendments discussed below, we also are proposing to reorganize Item 103 to incorporate the contents of the current instructions into the text of Item 103 and to eliminate the instructions. E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules 1. Expressly Provide for the use of Hyperlinks or Cross-References To Avoid Repetitive Disclosure Although Item 103 of Regulation S–K and U.S. GAAP differ in certain respects, they also have overlapping disclosure requirements.214 Thus, in order to comply with Item 103, registrants commonly repeat some or all of the disclosures that are provided elsewhere in the document, such as, for example, in the notes to the financial statements under U.S. GAAP, the MD&A, and the Risk Factors sections. In an effort to encourage registrants to avoid duplicative disclosure, we propose to revise Item 103 to expressly state that some or all of the required information may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document. 2. Update the Disclosure Threshold for Environmental Proceedings in Which the Government Is a Party Instruction 5.C. to Item 103 specifically requires disclosure of 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.215 Pursuant to NEPA, Congress required all Federal agencies to include consideration of the environment in regulatory action.216 The Commission’s initial action in the environmental area came in 1971 when an interpretive release was issued alerting registrants to the potential disclosure obligations that could arise from material environmental litigation and the material effects of compliance with environmental laws.217 After an assessment of the disclosure elicited under this release, the Commission determined that more specific disclosure standards were jbell on DSK3GLQ082PROD with PROPOSALS2 214 See supra note 207 and infra note 235. 215 17 CFR 229.103. 216 See NEPA, supra note 146. 217 See Disclosures Pertaining to Matters Involving the Environment and Civil Rights, Release No. 33–5170 (July 19, 1971) [36 FR 13989 (July 29, 1971)] (‘‘The Commission’s requirements for describing a registrant’s business on the forms and rules under the Securities and Exchange Act call for disclosure, if material, when compliance with statutory requirements . . . may materially affect the earning power of the business, or cause material changes in registrant’s business done or intended to be done. Further, the Commission’s disclosure requirements relating to legal proceedings call for disclosure, where material, of proceedings arising . . . under statutes, Federal, state or local, regulating the discharge of materials into the environment, or otherwise specifically relating to the protection of the environment . . . .’’). VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 necessary and the Commission adopted amendments to certain registration and reporting forms in 1973.218 The amendments required disclosure of (1) 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, and (2) any material pending or contemplated administrative or judicial proceedings involving Federal, state or local environmental laws, as well as any environmental proceeding by a governmental authority.219 While these amendments called for disclosure of all environmental proceedings involving governmental authorities, the Commission recognized that a complete description of each such proceeding might cause disclosure documents to be excessively detailed without a commensurate benefit to investors.220 Therefore, the Commission also adopted at that time a provision which allowed registrants to group similar governmental proceedings and to describe them generally.221 As noted earlier,222 in 1975 the Commission initiated public proceedings 223 to elicit comments on whether further rulemaking in the environmental area was appropriate. The Commission solicited comments on a number of issues affecting environmental disclosure, such as the relevance of those disclosures to informed voting decisions.224 The request for comments resulted in certain staff recommendations, as set forth in the 1979 Staff Report on Corporate Accountability, concerning the Commission’s environmental disclosure provisions.225 The Staff Report concluded that disclosure of all environmental proceedings to which a governmental authority is a party resulted in lengthy disclosures which obscured more significant environmental proceedings.226 The Staff 218 See Environmental Disclosure Adopting Release, supra note 147. 219 See id. 220 See id. 221 See id. 222 See supra notes 148 and 149 and accompanying text. 223 See Release No. 33–5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 18, 1975)]. As previously noted, as a result of these proceedings, the Commission amended its forms in 1976 to specifically require disclosure of any material estimated capital expenditures for environmental control facilities for the remainder of the registrant’s current fiscal year and its succeeding fiscal year, and for any further periods that are deemed material. See Release No. 33–5704, supra note 150. 224 See Release No. 33–5569, supra note 223, at 7015. 225 See Staff Report, supra note 148, at 250–86. 226 See id. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 44373 Report stated that ‘‘more focused disclosure could be more beneficial to investors and shareholders’’ and recommended that the disclosure requirement be amended to allow for a materiality threshold, instead of requiring disclosure of all such proceedings.227 Consistent with the Staff Report,228 the Commission added environmental disclosure thresholds (including Instruction 5.C.) to current Item 103 in 1982.229 The 1982 amendments included new subparts A, B, and C to Instruction 5 of Item 103, with subpart C permitting registrants not to disclose environmental proceedings to which the government is a party if the registrant reasonably believes that monetary sanctions resulting from the proceedings will be less than $100,000.230 The 1981 proposing release for these amendments indicated that the $100,000 threshold was based in part on actual fines assessed in environmental proceedings at the time.231 In that release, the Commission stated its belief that disclosure of fines by governmental authorities may be of particular importance in assessing a registrant’s environmental compliance problems, and that a disclosure threshold based on governmental fines may be more indicative of possible illegality and conduct contrary to public policy than other measures.232 Since the current requirements in Instruction 5.C. to Item 103 were adopted in 1982, the Commission has explored ways in which environmental disclosures could be improved for investors while not unduly burdening registrants. For example, the 1996 Report of the Task Force on Disclosure Simplification recommended replacing the $100,000 threshold with a general materiality standard or, alternatively, recommended raising the dollar threshold that triggers disclosure.233 The Task Force made this recommendation noting that in some circumstances the ‘‘one size fits all’’ approach may result in the disclosure of information about environmental proceedings not material to an 227 See id. id. 229 See 1982 Integrated Disclosure Adopting Release, supra note 9. 230 See id. 231 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)]. 232 See id. 233 See Report of the Task Force on Disclosure Simplification (Mar. 5, 1996), available at https:// www.sec.gov/news/studies/smpl.htm. 228 See E:\FR\FM\23AUP2.SGM 23AUP2 44374 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules investment decision.234 However, the recommended changes were not proposed. Although the DUSTR Proposing Release did not specifically seek comment on the bright-line $100,000 threshold in Instruction 5.C. to Item 103,235 some commenters expressed opposition to 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.236 These commenters expressed concern about using a materiality standard for disclosure because it may reduce the information made available to investors or diminish comparability of registrants.237 Other commenters supported eliminating the bright-line thresholds and generally supported a more principles-based disclosure framework.238 These commenters also asserted that materiality is a better disclosure standard because certain of the existing bright-line thresholds result in disclosure that may not be material to investors, may obscure material information and may be costly to provide.239 We continue to believe that a disclosure threshold based on the imposition of a governmental fine is appropriate because such a fine may be important for investors in assessing a registrant’s environmental compliance.240 A disclosure threshold 234 See id. DUSTR Proposing Release more generally discussed the overlap in disclosure that could result from compliance with the requirements under Item 103 and U.S. GAAP, which requires the disclosure of loss contingencies (see ASC 450–20), and noted the differences between the two sets of requirements. See DUSTR Proposing Release, supra note 129, at 51633–51634. Following a discussion of those differences, the Commission solicited comment on whether inclusion of the Item 103 disclosures in the audited financial statements would create significant burdens for issuers and auditors. See DUSTR Proposing Release, supra note 129 at 51635. Because of the concerns expressed by the many commenters that opposed the integration of Item 103 into U.S. GAAP, the Commission did not amend the Item 103 disclosure requirements. See DUSTR Adopting Release, supra note 62, at 50174. 236 See, e.g., letters from AFL–CIO (Oct. 31, 2016) [DUSTR letter], CalPERS (Nov. 2, 2016) [DUSTR letter], CFA Institute (Dec. 7, 2016) [DUSTR letter], Public Citizen (Oct. 18, 2016) [DUSTR letter], and R.G. Associates, Inc. (Nov. 2, 2016) [DUSTR letter]. 237 See id. 238 See, e.g., letters from CAQ 1, CGCIV 1, Chamber 1, The Clearing House Association L.L.C. (Oct. 28, 2016) (‘‘Clearing House’’), Davis 1, and Financial Executives International (Oct. 27, 2016) [DUSTR letters]. 239 See, e.g., letters from CAQ 1, CGCIV 1, Clearing House, Davis 1, Deloitte & Touche LLP (Oct. 5, 2016) [DUSTR letter], EEI and AGA 1, NAREIT 1, Shearman 1, and Chamber 1. 240 See supra note 232 and accompanying text. jbell on DSK3GLQ082PROD with PROPOSALS2 235 The VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 based on imposition of a governmental fine also provides a useful benchmark for registrants when determining whether a particular environmental proceeding, which can be factually and legally complex, should be disclosed. Such a disclosure threshold also promotes comparability among registrants in the disclosure of environmental proceedings. For these reasons, we propose to retain a disclosure threshold for environmental proceedings based on the imposition of a governmental fine. However, as the $100,000 disclosure threshold for environmental proceedings in which the government is a party has not been changed since it was adopted in 1982, we propose to increase this threshold to $300,000 to adjust it for inflation. Using the May 1981 date of the proposing release in which the $100,000 threshold was first mentioned and using the Consumer Price Index (CPI) Inflation Calculator, we estimate that the threshold would be $285,180.40 as of May 2019.241 For ease of reference, we propose rounding this amount up to $300,000. This increase would reflect an inflation adjustment to modernize this disclosure requirement. Request for Comment 30. Would our proposed revisions to Item 103 improve disclosures required by the item? Are there different or additional revisions we should consider to improve Item 103 disclosure? 31. Should we expressly provide for the use of hyperlinks or crossreferences, as proposed? Would the use of multiple hyperlinks be cumbersome for investors? Are there alternative recommendations that would more effectively decrease duplicative disclosure? 32. Should we adjust the $100,000 threshold for environmental proceedings in which the government is a party in Item 103 for inflation, as proposed? Should this threshold be adjusted for inflation periodically, such as every three years or some other interval? Does CPI inflation provide an appropriate adjustment factor for environmental proceedings? If not, what adjustment factor should we use? 33. Should we instead adopt an alternative threshold for environmental proceedings disclosure? If so, what threshold should we use, and what data or sources should provide the basis for the alternative threshold? Should we raise the dollar threshold above the 241 See CPI Inflation Calculator, available at https://data.bls.gov/cgi-bin/cpicalc.pl. The calculator uses the Consumer Price Index for All Urban Consumers (CPI–U) U.S. city average series for all items, not seasonally adjusted. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 proposed $300,000 threshold, e.g., to $500,000, $750,000, or $1,000,000, and if so, what would be the basis for that increase? Are there alternative approaches (e.g., a materiality threshold) that would work better than a bright-line dollar threshold? If so, describe the approach and explain why it would be preferable to our proposal. 34. Form 20–F requires a foreign private issuer to provide information on any legal or arbitration proceedings, including governmental proceedings pending or known to be contemplated, which may have, or have had in the recent past, significant effects on the company’s financial position or profitability.242 Similar to the proposed amendment to Item 103, should we amend Form 20–F to expressly state that some or all of the required information about legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere? Should we amend Form 20–F to clarify that a foreign private issuer is only required to disclose material legal proceedings? Would either amendment reduce a foreign private issuer’s ability to use a single disclosure document in multiple jurisdictions? 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.243 The principlesbased 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 subcaption that adequately describes the risk.244 The Concept Release solicited comments on how to improve risk factor disclosure and sought feedback on several potential approaches aimed at facilitating more meaningful disclosure.245 Comments received were 242 See Form 20–F, Item 8.A.7. CFR 229.105. As previously noted, in the FAST Act Adopting Release the Commission rescinded Item 503(c) of Regulation S–K and replaced it with new Item 105 of Regulation S–K. See supra note 1. 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]. See Item 1A of Form 10, Form 10–K, and Form 10–Q. 244 See id. 245 See Concept Release, supra note 6. The potential approaches discussed included, for example, requiring that each risk factor be 243 17 E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 wide-ranging and no consensus emerged. Numerous commenters supported a flexible or principles-based requirement.246 Several commenters recommended integrating risk factor disclosures with other non-risk and riskrelated disclosures.247 Some commenters recommended further guidance on risk factor disclosure to illustrate what registrants should do to meet the Item’s disclosure objectives.248 Other commenters supported retaining the current approach to risk factors and opposed any changes to the current risk factor guidance and disclosure.249 The revisions that we are proposing to Item 105 are intended 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 varies, studies show that risk factor disclosures have increased in recent years.250 For example, one study accompanied by a specific discussion of how the registrant is addressing the risk, requiring registrants to discuss the probability of occurrence and the effect on performance of each risk factor and requiring registrants to describe their assessment of risks. 246 See letters from CAQ, AFLAC, Chamber, FedEx, CGCIV, NAM, ACC, SIFMA, E&Y, EEI and AGA, Wilson Sonsini, NAREIT, Davis, Fenwick, NIRI, Shearman, PWC, General Motors, and Financial Executives International. 247 See letters from PNC, SIFMA, CalPERS, the Carbon Tracker Initiative, Medical Benefits Trust, E&Y, and BDO. 248 See letters from NYSSCPA, General Motors, and Financial Executives International. 249 See letters from Ball Corporation, API, and Chevron. 250 See PricewaterhouseCoopers LLP, Stay Informed, 2012 Financial Reporting Survey: Energy industry current trends in SEC reporting, Feb. 2013, available at https://www.pwc.com/en_GX/gx/oil-gasenergy/publications/pdfs/pwc-sec-financialreporting-energy.pdf (‘‘2012 PWC Report’’). This report reviewed financial reporting trends of 87 registrants with market capitalizations of at least $1 billion that apply U.S. GAAP in the following subsectors of the energy industry: Downstream, drillers, independent oil and gas, major integrated oil and gas, midstream and oil field equipment and services. Based on this study, the average number of risk factors in the major integrated oil and gas sector was 12 while the average number of risk factors in the midstream sector was 51. In one sector, the maximum number of risk factors was 95. See also PricewaterhouseCoopers LLP, Stay Informed: 2014 technology financial reporting trends, Aug. 2014, available at https:// www.pwc.com/en_US/us/technology/publications/ assets/pwc-2014-technology-financial-reportingtrends.pdf (reviewing the annual and periodic filings of 135 registrants in the software and internet, computers and networking, and semiconductors sectors, and finding that over half of the registrants surveyed repeated all of their risk factors in their quarterly filings); and Travis Dyer, Mark Lang and Lorien Stice-Lawrence, The EverExpanding 10–K: Why Are 10–Ks Getting So Much Longer (and Does It Matter)?, The Columbia Law School Blue Sky Blog (May 5, 2016), available at https://clsbluesky.law.columbia.edu/2016/05/05/theever-expanding-10-k-why-are-10-ks-getting-somuch-longer-and-does-it-matter/ (reporting the results of a study of Form 10–Ks filed between 1996 VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 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 10 percent, and that this increase in risk factor word count may not be associated with better disclosure.251 A contributing factor to the increased length of risk factor disclosure appears to be the inclusion of generic, boilerplate risks that could apply to any offering or registrant. Although Item 105 instructs registrants not to present risks that could apply to any registrant, and despite Commission and staff guidance stating that risk factors should be focused on the ‘‘most significant’’ risks and should not be boilerplate,252 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. To address these concerns, we are proposing the following three amendments to the Item 105 risk factor disclosure requirement. 1. Require Summary Risk Factor Disclosure if the Risk Factor Section Exceeds 15 Pages As a way of addressing the length of risk factor disclosure, the Commission has previously considered requiring a page limit for risk factor disclosure.253 However, the Commission has not and 2013 and finding that the length of Form10– K has more than doubled in word length, with forward-looking risk factor disclosures being one of three substantial reasons for this increase, and contributing to Form 10–Ks becoming more redundant and complex). 251 See Anne Beatty et al., Sometimes Less is More: Evidence from Financial Constraints Risk Factor Disclosures, Mar. 2015, available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=2186589. 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. 252 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. 253 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. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 44375 adopted such a requirement to date in light of comments received in response to prior initiatives. For example, while the Concept Release did not seek specific feedback on reducing or limiting the length of risk factor disclosure, several commenters nonetheless opposed a page limit.254 Commenters attributed the growing length of risk factor disclosure to the risk of litigation associated with failing to disclose risks if events turn negative.255 Commenters also stated that many companies will continue to disclose generic risks unless assured that litigation will not result from the failure to do so.256 Similar comments were received in response to the general solicitation of comment on the Disclosure Effectiveness Initiative.257 The Concept Release sought input on whether to require summary risk factor disclosure in addition to complete risk factor disclosure and whether highlighting information in a summary would help investors better understand a registrant’s risks.258 Several commenters opposed summary risk factor disclosure, stating that a summary would not add value and would result in repetition of disclosure.259 Further, some commenters noted that registrants provide headings before each specific risk factor, which effectively act as a summary.260 Some commenters 254 See letters from ACC, API, Chevron, CAQ, PNC, Wilson Sonsini, Maryland Bar Securities Committee, PWC, CalPERS, Four Twenty Seven, Fenwick, and NYSSCPA. 255 See letters from Wilson Sonsini, Maryland State Bar, and PNC. 256 See id. 257 See, e.g., letter from The Society of Corporate Secretaries and Governance Professionals (Sept. 10, 2014) [Disclosure Effectiveness letter] (referencing the Commission’s proposal to limit the number of risk factors included in a filing in connection with the Commission’s Plain English initiative and comments received in connection with that initiative, and quoting approvingly from the letter from the Committee on Securities Regulation of the Business Law Section of the New York State Bar Association (Mar. 21, 1997), available at https:// www.sec.gov/rules/proposed/s7397/gutman1.htm, that ‘‘no issuer should ever be put in the position of choosing significant material risks in order to satisfy a numerical limitation’’). 258 See Concept Release, supra note 6. Item 3(b) to Form S–11 includes such a requirement, stating that ‘‘[w]here 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.’’ See 17 CFR 239.18. 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. 259 See letters from SIFMA, Fenwick, NIRI, and General Motors. 260 See letters from SIFMA, Fenwick, and General Motors. E:\FR\FM\23AUP2.SGM 23AUP2 44376 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules specified that a summary should be encouraged but not required.261 Given the increasing length of risk factor disclosure and after considering the comments received, we propose to amend Item 105 to require summary risk factor disclosure if the risk factor section exceeds 15 pages.262 Lengthy risk factor disclosure and the inclusion of many general risks add to the complexity of disclosure documents, without necessarily providing additional meaningful information to investors. When registrants provide risk disclosure that exceeds 15 pages, we propose to require registrants to provide summary risk factor disclosure in the forepart of the prospectus or annual report, as applicable, under an appropriately captioned heading. The summary would consist of a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky. The proposed 15-page threshold may provide registrants with an incentive to limit the length of their risk factor disclosure. We estimate that a 15page threshold would affect approximately 40 percent of current filers.263 If registrants determine that it is appropriate to provide risk factor disclosure that exceeds 15 pages, summary risk factor disclosure highlighted in the forepart of the document should enhance the readability and usefulness of this disclosure for investors. We believe that this approach would appropriately balance the need to provide more focused disclosure about a registrant’s risk profile with the concerns raised by commenters about imposing page limits on risk factor disclosure. 2. Replace the Requirement To Disclose the ‘‘Most Significant’’ Factors With the ‘‘Material’’ Factors Since the Commission first published guidance on risk factor disclosure in 1964,264 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.265 Notwithstanding this additional guidance, the length of 261 See letters from E&Y and Deloitte. staff reviewed a representative sample of filings to help determine the proposed threshold. See infra Section IV, note 314. 263 See infra Section IV.B.2. 264 See Guides for Preparation and Filing of Registration Statements, Release No. 33–4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 1964)] (‘‘1964 Guides’’). 265 ‘‘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. jbell on DSK3GLQ082PROD with PROPOSALS2 262 Commission VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 risk factor disclosure and the number of risks disclosed has increased in recent years.266 We are proposing to update Item 105 to replace the requirement to discuss the ‘‘most significant’’ risks with ‘‘material’’ risks. Securities Act Rule 405 defines ‘‘material’’ as follows: The term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security.267 We propose revising the standard for disclosure from the ‘‘most significant’’ risks to ‘‘material’’ risks to focus registrants on disclosing the risks to which reasonable investors would attach importance in making investment decisions. We believe that this approach could result in risk factor disclosure that is more tailored to the particular facts and circumstances of each registrant, which would reduce the amount of risk factor disclosure that is not material and potentially shorten the length of the risk factor discussion, to the benefit of both investors and registrants.268 3. Require Registrants To Organize Risk Factors Under Relevant Headings Since 1964, the Commission has periodically emphasized the importance of organized and concise risk factor disclosure.269 The Concept Release solicited feedback on the ways in which we could improve the organization of registrants’ risk factor disclosure to help investors better navigate the disclosure.270 Several commenters supported grouping similar risks together,271 with one commenter noting that the current organizational structure, and not the length, of risk factor disclosure, should be the primary 266 See supra notes 250 and 251 and accompanying text. 267 17 CFR 230.405. Exchange Act Rule 12b–2 defines materiality similarly: ‘‘The term ‘material,’ when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered.’’ 12 CFR 240.12b–2 (emphasis added). 268 For a discussion of the potential economic effects of switching from a ‘‘most significant’’ risks to a ‘‘material risks’’ disclosure standard, including the possibility that the change could result in either more or less expansive disclosure, see infra Section IV.B.2.iv. 269 See 1964 Guides, supra note 264; 1982 Integrated Disclosure Adopting Release, supra note 9; and Securities Offering Reform, Release No. 33– 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]. 270 See Concept Release, supra note 6. 271 See letters from PNC, Fenwick, and Wilson Sonsini. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 concern.272 As stated above, some commenters noted that registrants often provide headings before each specific risk factor, which act as a summary.273 Further, one commenter noted that the grouping of related risk factors together under subheadings for clarity is a best practice currently used by many registrants as risk factors have lengthened.274 The Concept Release also solicited comment on whether generic risk factors are important to investors and if not, how to discourage this disclosure.275 As noted above, several commenters discussed the importance of including both specific and generic risk disclosures.276 One of these commenters supported revising the current text of Item 105 to eliminate the proscription against including ‘‘risks that could apply to any issuer or offering.’’ 277 In contrast, many commenters opposed inclusion of generic risk factors.278 We are proposing to require registrants to organize their risk factor disclosure under relevant headings in an effort to help readers comprehend lengthy risk factor disclosures. As noted above, many registrants already do this and we believe that further organization within risk factor disclosure will improve the effectiveness of the disclosures. In addition, if a registrant chooses to disclose a risk that could apply to other companies or securities offerings and the disclosure does not provide an explanation of why the identified risk is specifically relevant to an investor in its securities, we are proposing to require the registrant to disclose such risk factors at the end of the risk factor section under the caption ‘‘General Risk Factors.’’ Request for Comment 35. Would our proposed approach to Item 105 result in improved risk factor disclosure for investors? 36. Would our proposal to require summary risk factor disclosure if the 272 See 273 See letter from Wilson Sonsini. letters from SIFMA, Fenwick, and General Motors. 274 See letter from Fenwick. 275 See Concept Release, supra note 6. 276 See letters from E&Y, Maryland Bar Securities Committee, and CalPERS (refuting the notion that generic and boilerplate risk factors cannot impart material information); see also letter from NYSSCPA (stating that generic and boilerplate risk factors should be included if critical to the overall understanding of a registrant’s business environment). 277 See letter from E&Y. 278 See letters from EEI and AGA, Investment Program Association (July 21, 2016), NAREIT, Better Markets (July 21, 2016), Davis, Fenwick, Reardon, NIRI, Financial Services Roundtable, Shearman and A. Radin. E:\FR\FM\23AUP2.SGM 23AUP2 jbell on DSK3GLQ082PROD with PROPOSALS2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules risk factor discussion exceeds 15 pages result in improved risk factor disclosure for investors? 37. Is 15 pages an appropriate number of pages to trigger summary risk factor disclosure? If not, what is the appropriate page limit that should trigger summary risk factor disclosure? Is there a better alternative than a page limit to trigger summary risk factor disclosure (e.g., should we consider a word limit instead)? 38. If summary risk factor disclosure is triggered, should we require the summary to consist of a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky, as proposed? Should we in addition or instead limit the length of the summary disclosure (e.g., no more than one page)? Should we require the bulleted or numbered statements summarizing the risk factors to also include hyperlinks to each of the risk factors summarized? 39. If the risk factors discussion exceeds 15 pages, should we require a registrant to include only those risk factors that pose the greatest risk to the registrant in the first 15 pages instead of requiring it to prepare a risk factor summary? 40. Should we specify that registrants should present summary risk factor disclosure in the forepart of the prospectus or annual report, as proposed? Alternatively, should the summary immediately precede the full discussion of risk factors? Currently, when the risk factor discussion is included in a registration statement, it must immediately follow the summary section. Should registrants be permitted to provide the full discussion of risk factors elsewhere in the document to enhance readability when a summary section is included? 41. Would changing the standard from the requirement to discuss the ‘‘most significant’’ factors to the ‘‘material’’ factors, as proposed, result in more tailored disclosure and reduce the length of the risk factor disclosure? Would changing the standard, as proposed, result in other consequences that we have not considered? If so, provide specific examples of such consequences. 42. Would our proposal that registrants organize their risk factors under relevant headings improve disclosures for investors? 43. Should we require registrants to prioritize the order in which they discuss their risk factors so that the risk factors that pose the greatest risk to the registrant are discussed first? Would VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 this improve disclosures for investors or be unduly burdensome for registrants? 44. If the registrant discloses generic risk factors, should the registrant be required to disclose them at the end of the risk factor section, and caption them as General Risk Factors, as proposed? 45. Should we require registrants to explain how generic, boilerplate risk factors are material to their investors, and what, if anything, management does to address these risks? 46. Foreign private issuers that file their Exchange Act annual reports on Form 20–F must provide risk factor disclosure as required by that Form whereas foreign private issuers that file registration statements on Forms F–1, F–3, and F–4 must provide risk factor disclosure pursuant to Item 105. Currently Form 20–F does not require a summary of the risk factors if the risk factor disclosure exceeds a certain page limit, does not state that material risks should be disclosed, and does not require the presentation of risk factors, including generic risk factors, under appropriate headings. Should we amend Form 20–F to include any or all of the proposed risk factor disclosure provisions under Item 105? If we do not similarly amend risk factor disclosure under Form 20–F, would having one set of risk factor disclosure requirements for Form 20–F annual reports and another set for registration statements on Forms F–1, F–3, and F–4 cause confusion for registrants or investors? 47. How might we further improve risk factor disclosure? III. General Request for Comments We request and encourage any interested person to submit comments on any aspect of our proposals, other matters that might have an impact on the proposed amendments, and any suggestions for additional changes. With respect to any comments, we note that they are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to our proposals where appropriate. IV. Economic Analysis This section analyzes the expected economic effects of the proposed amendments relative to the current baseline, which consists of both the regulatory framework of disclosure requirements in existence today and the current use of such disclosure by investors. As discussed above, we propose amendments to modernize and simplify the description of business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosure PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 44377 requirements in Regulation S–K.279 An important objective of the proposed amendments is to revise Items 101(a), 101(c), and 105 to be more principlesbased. Overall, investors and registrants may benefit from the proposed principles-based approach if the existing prescriptive requirements result in disclosure that is not material to an investment decision and is costly to provide. We acknowledge the risk that emphasizing a principles-based approach and granting registrants more flexibility to determine what and how much disclosure about a topic to provide may result in the elimination of some information to investors. However, we believe that any such loss of information would be limited given that, under the proposed principlesbased approach, registrants still would be required to provide disclosure about these topics if they are material to the business. We are sensitive to the costs and benefits of these amendments. The discussion below addresses the potential economic effects of the proposed amendments, including the likely benefits and costs, as well as the likely effects on efficiency, competition, and capital formation.280 At the outset, 279 While Items 101, 103 and 105 have not undergone significant revisions in over thirty years, many characteristics of the registrants have changed substantially over this time period. For example, in 1988, the largest 500 U.S. companies in Standard & Poor’s Compustat database had an average market capitalization of $4.27 billion, foreign income of $281 million, and ratio of intangible assets to market capitalization of 8.44%. The largest 100 companies had an average market capitalization of $12.25 billion, foreign income of $730 million, and ratio of intangible assets to market capitalization of 7.07%. In 2018, the largest 500 companies had an average market capitalization of $49.10 billion, foreign income of $1.70 billion, and ratio of intangible assets to market capitalization of 29.70%. The largest 100 companies had an average market capitalization of $ 141.46 billion, foreign income of $5.18 billion, and ratio of intangible assets to market capitalization of 32.62%. There is also significant turnover among the largest companies: approximately 34% of top 50 companies in 1988 were still in the top 50 companies on 2018. We believe that certain of the proposed amendments (the disclosure of the material effects of compliance with material government regulations, including foreign government regulations) would provide investors with information consistent with the changing nature of the registrants. 280 Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] require the Commission, when engaging in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. Further, Section 23(a)(2) of the Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when making rules under the Exchange Act, to consider the impact that the rules would have on competition, and prohibits the Commission from adopting any rule that would E:\FR\FM\23AUP2.SGM Continued 23AUP2 44378 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules we note that, where possible, we have attempted to quantify the benefits, costs, and effects on efficiency, competition, and capital formation expected to result from the proposed amendments. In many cases, however, we are unable to quantify the economic effects because we lack information necessary to provide a reasonable estimate. For example, we are unable to quantify, with precision, the costs to investors of utilizing alternative information sources under each disclosure item and the potential information processing cost savings that may arise from the elimination of disclosures not material to an investment decision. jbell on DSK3GLQ082PROD with PROPOSALS2 A. Baseline and Affected Parties Our baseline includes the current disclosure requirements under Items 101, 103, and 105 of Regulation S–K, which apply to registration statements, periodic reports, and certain proxy statements filed with the Commission. Thus, the parties that are likely to be affected by the proposed amendments include investors and other users of registration statements and periodic reports, and proxy statements, such as financial analysts, as well as registrants subject to Regulation S–K. The proposed amendments affect both domestic issuers and foreign private issuers 281 that file on domestic forms 282 and foreign private issuers that file on foreign forms.283 We estimate impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act. 281 See supra note 24 for the definition of foreign private issuer. 282 The number of issuers that file on domestic forms is estimated as the number of unique issuers, identified by Central Index Key (CIK), that filed Forms 10–K and 10–Q, or an amendment thereto, with the Commission during calendar year 2018. We believe that these filers are representative of the registrants that would primarily be affected by the proposed amendments. For purposes of this economic analysis, these estimates do not include issuers that filed only initial domestic Securities Act registration statements during calendar year 2018, and no Exchange Act reports, in order to avoid including entities, such as certain coregistrants of debt securities, which may not have independent reporting obligations and therefore would not be affected by the proposed amendments. Nevertheless, the proposed amendments would affect any registrant that files a Securities Act registration statement and assumes Exchange Act reporting obligations. We believe that most registrants that have filed a Securities Act registration statement, other than the co-registrants described above, would be captured by this estimate through their Form 10–K and Form 10–Q filings. The estimates for the percentages of smaller reporting companies, accelerated filers, large accelerated filers, and non-accelerated filers are based on data obtained by Commission staff using a computer program that analyzes SEC filings, with supplemental data from Ives Group Audit Analytics. 283 The number of affected issuers that file foreign forms is estimated as the number of unique companies, identified by Central Index Key (CIK), VerDate Sep<11>2014 18:47 Aug 22, 2019 Jkt 247001 that approximately 6,919 registrants filing on domestic forms 284 and 393 foreign private issuers filing on foreign forms would be affected by the proposed amendments. Among the registrants that file on domestic forms, approximately 29 percent are large accelerated filers, 19 percent are accelerated filers, 19 percent are nonaccelerated filers, and 33 percent are smaller reporting companies. In addition, we estimate that approximately 21.3 percent of domestic issuers are emerging growth companies.285 B. Potential Costs and Benefits In this section, we discuss the anticipated economic benefits and costs of the proposed amendments. We first analyze the overall economic effects of shifting toward a more principles-based approach to disclosure, which is one of the main objectives of the proposed amendments. We then discuss the potential costs and benefits of specific proposed amendments. 1. Principles-Based Versus Prescriptive Requirements Prescriptive requirements employ bright-line, quantitative thresholds to identify when disclosure is required, or require registrants to disclose the same types of information. Principles-based requirements, on the other hand, provide registrants with the flexibility to determine (i) whether certain information is material, and (ii) how to disclose such information. In this release, we propose to revise Items 101(a), 101(c), and 105 to be more principles-based.286 Principles-based requirements may result in more or less detail than prescriptive requirements, that filed Forms F–1, F–3, and F–4, or an amendment thereto with the Commission during calendar year 2018. See also supra note 24. 284 This number includes fewer than 25 foreign issuers that file on domestic forms and approximately 100 business development companies. 285 An ‘‘emerging growth company’’ is defined as an issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year. See 17 CFR 230.405 and 17 CFR 240.12b–2. See Rule 405; Rule 12b–2; 15 U.S.C. 77b(a)(19); 15 U.S.C. 78c(a)(80); and Inflation Adjustments and Other Technical Amendments under Titles I and II of the JOBS Act, Release No. 33–10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)]. We based the estimate of the percentage of emerging growth companies on whether a registrant claimed emerging growth company status, as derived from Ives Group Audit Analytics data. 286 Although Items 101(c) and Item 105 use a principles-based approach, based on comments received on prior initiatives, it appears that some registrants may view these items as imposing prescriptive requirements. See supra Sections II.B and II.D. Therefore, we are proposing amendments to emphasize the principles-based approach of these items. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 which set forth explicit criteria for disclosure. The economic effects of replacing a prescriptive requirement with a more principles-based disclosure standard based on materiality depend on a variety of factors, including the preferences of investors, the compliance costs of producing the disclosure and the nature of the information to be disclosed. For certain existing disclosure requirements, shifting to a more principles-based approach could benefit issuers with no loss of investor protection because the current requirements occasionally result in some disclosure that is immaterial to an investment decision and costly for issuers to provide. Elimination of disclosure that is not material could reduce compliance burdens and potentially benefit investors, to the extent it improves the readability and conciseness of the information provided.287 In addition, a principlesbased approach may permit or encourage registrants to present more tailored information, which also may benefit investors.288 287 See A. Lawrence, Individual Investors and Financial Disclosure, 56 J. Acct. & Econ., 130¥147 (2013). Using data on trades and portfolio positions of 78,000 households, this article shows that individuals invest more in firms with clear and concise financial disclosures. This relation is reduced for high frequency trading, financiallyliterate, and speculative individual investors. The article also shows that individuals’ returns increase with clearer and more concise disclosures, implying such disclosures reduce individuals’ relative information disadvantage. A one standard deviation increase in disclosure readability and conciseness corresponds to return increases of 91 and 58 basis points, respectively. The article acknowledges that, given the changes in financial disclosure standards and the possible advances in individual investor sophistication, the extent to which these findings, which are based on historical data from the 1990s, would differ from those today is unknown. Recent advances in information processing technology, such as machine learning for textual analysis, may also affect the generalizability of these findings. 288 A number of academic studies have explored the use of prescriptive thresholds and materiality criteria. Many of these papers highlight a preference for principles-based materiality criteria. See, e.g. Eugene A. Imhoff Jr. and Jacob K. Thomas, Economic consequences of accounting standards: The lease disclosure rule change, 10.4 J. Acct. & Econ. 277–310 (1988) (providing evidence that management modifies existing lease agreements to avoid crossing rules-based criteria for lease capitalization); Cheri L. Reither, What are the best and the worst accounting standards?, 12.3 Acct. Horizons 283 (1998) (documenting that due to the widespread abuse of bright-lines in rules for lease capitalization, SFAS No. 13 was voted the least favorite FASB standard by a group of accounting academics, regulators, and practitioners); Christopher P. Agoglia, Timothy S. Doupnik, and George T. Tsakumis. Principles-based versus rulesbased accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions, 86.3 The Acct. Rev. 747–767 (2011) (conducting experiments in which experienced financial statement preparers are placed in a lease classification decision context and E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 On the other hand, shifting to a more principles-based approach may result in the elimination of disclosure material to an investment decision if issuers misjudge what information is material.289 To the extent that prescriptive requirements result in more complete disclosures, such requirements could benefit investors by reducing information asymmetry. Reducing information asymmetry may also benefit registrants by improving stock market liquidity and decreasing cost of capital.290 Further, prescriptive standards could enhance the comparability and verifiability of information.291 We acknowledge, however that differences between principles-based standards and prescriptive standards have been studied in the accounting context. These differences may be narrower in the context of the proposed amendments finding that preparers applying principles-based accounting are less likely to make aggressive reporting decisions than preparers applying a more precise rules-based standard and supporting the notion that a move toward principles-based accounting could result in better financial reporting); Usha Rodrigues and Mike Stegemoller, An inconsistency in SEC disclosure requirements? The case of the ‘‘insignificant’’ private target, 13.2– 3 J. Corp. Fin. 251–269 (2007) (providing evidence, in the context of mergers and acquisitions, where rule-based thresholds deviate from investor preferences). Papers that highlight a preference for rules-based materiality criteria are cited below. 289 The presence of other controls, including accounting controls, likely reduces the risk that issuers will misjudge what information is material. 290 See, e.g., C. Leuz and P. Wysocki, The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research, 54.2 Journal of Accounting Research 525– 622 (2016) (surveying the empirical literature on the economic consequences of disclosure and discussing potential capital-market benefits from disclosure and reporting, such as improved market liquidity and decreased cost of capital). 291 See Mark W. Nelson, Behavioral evidence on the effects of principles-and rules-based standards, 17.1 Accounting Horizons 91–104 (2003); and Katherine Schipper, Principles-based accounting standards, 17.1 Accounting Horizons 61–72 (2003) (noting potential advantages of rules-based accounting standards, including: Increased comparability among firms, increased verifiability for auditors, and reduced litigation for firms). See also Randall Rentfro and Karen Hooks, The effect of professional judgment on financial reporting comparability, 1 Journal of Accounting and Finance Research 87–98 (2004) (finding that comparability in financial reporting may be reduced under principles-based standards, which rely more heavily on the exercise of professional judgment but comparability may improve as financial statement preparers become more experienced and hold higher organizational rank); Andrew A. Acito, Jeffrey J. Burks, and W. Bruce Johnson, The Materiality of Accounting Errors: Evidence from SEC Comment Letters, 36.2 Contemp. Acct. Res. 839, 862 (2019) (studying managers’ responses to SEC inquiries about the materiality of accounting errors and finding that managers are inconsistent in their application of certain qualitative considerations and may omit certain qualitative considerations from their analysis that weigh in favor of an error’s materiality). VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 due to the qualitative nature of the disclosures in Items 101(a), 101(c), and 105. Prescriptive requirements also may be easier to apply, saving registrants the costs associated with materiality assessments. Some of the costs of shifting to a more principles-based approach could be mitigated by external disciplines, such as the Commission staff’s filing review program. In addition, registrants would remain subject to the antifraud provisions of the securities laws.292 There also may be incentives for registrants to voluntarily disclose additional information if the benefits of reduced information asymmetry exceed the disclosure costs. Differences between the principlesbased and prescriptive approaches are likely to vary across registrants, investors, and disclosure topics. Despite potential costs associated with materiality assessments, replacing prescriptive requirements with principles-based requirements is likely to reduce compliance costs because registrants would have the flexibility to determine whether certain information is material under the principles-based approach. To the extent the principlesbased approach reduces compliance costs, the cost reduction should be more beneficial to smaller registrants that are financially constrained. Although eliminating information that is not material should benefit all investors, it could benefit retail investors more since they are less likely to have the time and resources to devote to reviewing and evaluating disclosure. At the same time, smaller registrants with less established reporting histories may be the most at risk of persistent information asymmetries if the principles-based approach results in loss of information material to investors. In the event of loss of material information (the risk of which, as noted above, is offset by mitigants including accounting controls and the antifraud provisions of the securities laws), retail investors in these registrants may be more affected than institutional investors because obtaining information from alternative sources could involve monetary costs, such as database subscriptions, or opportunity costs, such as time spent searching for alternative sources, and these costs may fall more heavily on retail investors than on institutional investors. Across different disclosure topics, the principles-based approach may be more appropriate for topics where the relevant information tends to vary greatly across companies because, in 292 See, e.g., Exchange Act Rule 10b–5(b) [17 CFR 240.10b–5(b)]. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 44379 these situations, the more standardized prescriptive requirements are less likely to elicit information that is tailored to a specific company. A principles-based approach may also be more appropriate for disclosures that are episodic in nature since investors may derive relatively less value from comparisons of such disclosure for a given registrant over time. In addition, registrants may derive relatively less benefit from applying a standardized prescriptive approach to episodic disclosures, which may be less amenable to routinized reporting than periodic disclosures of information that arise on a regular basis. 2. Benefits and Costs of Specific Proposed Amendments We expect the proposed amendments would result in costs and benefits to registrants and investors, and we discuss those costs and benefits qualitatively, item by item, in this section. The proposed changes to each item would impact the compliance burden for registrants in filing particular forms. Overall, we expect the net effect of the proposed amendments on a registrant’s compliance burden to be limited. The quantitative estimates of changes in those burdens for purposes of the Paperwork Reduction Act are further discussed in Section V. As explained in the item-by-item discussion of the proposed amendments in this section, we expect certain aspects of the proposed amendments to increase compliance burdens, while others are expected to decrease the burdens. Taken together, we estimate that the proposed amendments are likely to result in a net decrease of between three and five burden hours per form for purposes of the Paperwork Reduction Act.293 i. General Development of Business (Item 101(a)) Item 101(a) requires a description of the general development of the registrant’s business, such as the year in which the registrant was organized and the nature and results of any merger of the registrant or its significant subsidiaries. Some academic research has found that information required under Item 101(a) is relevant to firm value. For example, the registrant’s age can predict its growth rates 294 and 293 See infra Section V.B. David S. Evans, The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries, 35 J. Indus. Econ. 567– 81 (1987) (finding that firm growth decreases with both firm size and age). See also C. Arkolakis, T. Papageorgiou, and O. A. Timoshenko, Firm Learning and Growth, 27 Rev. Econ. Dyn. 146–168 294 See E:\FR\FM\23AUP2.SGM Continued 23AUP2 44380 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 corporate innovation.295 Merger activities can affect shareholder value and predict future performance.296 Given the relevance of such information to firm value, and thus investors, the effects of the proposed amendments to Item 101(a) on investors would depend on whether they result in more concise 297 and material disclosures of business development information under Item 101(a). We propose to revise the requirements in Item 101(a) to be more principles based, requiring disclosure of information material to an understanding of the general development of the registrant’s business. The shift to a more principlesbased approach for these requirements would give rise to the potential economic effects discussed in Section IV.B.1 above. Currently, Item 101(a) requires registrants to describe their business development during the past five years, or such shorter period as the registrant may have engaged in business. We propose to eliminate the prescribed fiveyear timeframe for this disclosure. Eliminating this specific requirement would provide registrants with flexibility to choose a different timeframe that is more relevant in describing their business development to investors. For example, a long timeframe might be less appropriate for registrants operating in rapidly changing environments where historical information becomes irrelevant in a short period of time. Given that (2018) (developing a theoretical model showing that firm growth rates decrease with firm age and calibrating the model using plant-level data). 295 See Elena Huergo and Jordi Jaumandreu, How Does Probability of Innovation Change with Firm Age?, 22 Small Bus. Econ. 193–207 (2004) (finding that, as a firm’s age increases, the innovation rate diminishes and attributing this finding to the rapid innovation necessary for a firm to compete when entering a market); A. Coad, A. Segarra, and M. Teruel, Innovation and Firm Growth: Does Firm Age Play a Role?, 45 Res. Policy 387–400 (2016) (finding that young firms undertake riskier innovation and receive larger benefits from R&D). 296 See Sara B. Moeller, Frederik P. Schlingemann, and Rene M. Stulz, Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave, 60 J. Fin. 757–82 (2005) (finding that, although small gains were made in the 1980s, investors experienced negative gains from 1998 to 2001, and firms that announce acquisitions with large dollar losses performed poorly afterwards). See also Ran Duchin and Breno Schmidt, Riding the Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions, 107 J. Fin. Econ. 69–88 (2013) (finding that the average long-term performance of acquisitions initiated during merger waves is significantly worse than those initiated off the waves). 297 Investors may benefit from more concise disclosure that facilitates their ability to focus on information material to an investment decision. See supra note 286 for details. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 registrants have the flexibility to determine the appropriate timeframe, this proposed amendment is likely to reduce compliance costs. Investors may also benefit if the timeframe chosen by the registrants is more consistent with their preferences than the prescribed five-year timeframe, but may be harmed if the timeframe chosen by the registrants is less consistent with their preferences than the prescribed fiveyear timeframe. Currently, Item 101(a) requires registrants to describe their business development in registration statements and annual reports. For filings subsequent to the initial registration statement, we propose revising Item 101(a)(1) to require only an update of this disclosure with an active hyperlink to the registrant’s most recently filed disclosure that, together with the update, would present a complete discussion of the general development of its business.298 If duplicative disclosure distracts investors from other important information, the proposal may benefit investors by highlighting material developments in the reporting period. However, to the extent that historical information would be available through hyperlinking as opposed to being in the same filing, investors would have to spend more time to retrieve the information from another disclosure document. Because the proposed provisions would involve the use of only one hyperlink, we believe the increase in retrieval costs for investors would be minimal. While registrants may incur minimal compliance costs to include hyperlinks, we believe registrants would benefit from the proposal due to the reduction in costs to disclose duplicative information. We propose to amend Item 101(a) to provide a non-exclusive list of topics that should be disclosed if material. Providing potential disclosure topics should clarify the requirements and avoid potential confusion among registrants. Besides items currently required under Item 101(a), the proposed topics also include material changes to a registrant’s previously disclosed business strategy, which is not currently required to be disclosed. Since several studies have found that business strategy is a critical determinant of 298 A registrant would be required to incorporate by reference the earlier disclosure into the updated filing. See supra Section II.A.2. We are also proposing 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 proposed Item 101(a)(2), including the proposed hyperlink requirement. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 corporate success 299 and an essential component of business model design,300 investors may benefit from any increase in the disclosure of material changes to previously disclosed business strategies. Since we are not proposing to make the disclosure of business strategy mandatory if a registrant has not previously disclosed its business strategy, the costs of revealing proprietary information that could be harmful to registrants’ competitive positions should be somewhat limited. Overall, investors and registrants may benefit from the proposed amendments to Item 101(a) if the existing requirements elicit disclosure that is not material to an investment decision and/ or is more costly to provide. However, granting registrants additional flexibility to determine (i) whether certain information is material, and (ii) how to disclose such information may result in the elimination of information in cases in which issuers stop disclosing information material to an investment decision. ii. Narrative Description of Business (Item 101(c)) Item 101(c) requires a narrative description of the registrant’s business. The current requirement identifies twelve specific items that must be disclosed to the extent material to an understanding of the registrant’s business taken as a whole. We propose to revise the requirements in Item 101(c) to be more clearly principles based. The proposed amendments would require a description of the business and would set forth seven non-exclusive examples of information to be disclosed if material to an understanding of the 299 See Jay B. Barney, Strategic Factor Markets: Expectations, Luck, and Business Strategy 32 Mgmt. Sci. 1231–41 (1986) (suggesting that strategies focusing on creating imperfectly competitive product markets may not generate superior performance if the cost of implementing such strategies is high, and that strategic choices should flow mainly from the analysis of its antecedent unique skills and capabilities, rather than from the analysis of its competitive environment). See also T. Ritter and H. G. Gemunden, The Impact Of A Company’s Business Strategy on Its Technological Competence, Network Competence and Innovation Success, 57(5) J. Bus. Res. 548–556 (2004) (finding that a company’s innovation success is positively correlated with the strength of its technologyoriented business strategy). 300 See David J. Teece, Business Models, Business Strategy and Innovation, 43 Long Range Plan. 172– 94 (2009) (examining the significance of business models and explorings their connections with business strategy, innovation management, and economic theory). See also P. Spieth, D. Schneckenberg, K. Matzler, Exploring the Linkage between Business Model (&) Innovation and the Strategy of the Firm, 46 R&D Mgmt. 403–413 (2016) (examining firm strategy-business model linkage and exploring the role of business model innovation as analytic perspective for identifying sources of firm performance). E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 business. These examples include some, but not all, of the topics currently required under Item 101(c) as well as some additional topics. Emphasizing a principles-based approach to Item 101(c) would give rise to the potential economic effects discussed in Section I.B.1 above. In addition, eliminating prescriptive requirements for certain items, such as the number of employees, may diminish comparability across firms. The topics that would be retained as examples under the proposed amendments are: (1) Principal products produced and services rendered, and dependence on certain customers; (2) new products and competitive conditions; (3) sources and availability of raw materials and intellectual property; (4) business subject to renegotiation or termination of government contracts; (5) seasonality of the business; and (6) the material effects of compliance with environmental laws.301 Since the information required under Item 101(c) may be relevant to firm value,302 investors and registrants would likely benefit if the proposed examples elicit information material to an investment decision while allowing registrants to tailor the disclosure to their specific circumstances. Two of the proposed topics are more expansive than the current disclosure requirements contained in Item 101(c). We propose to replace the requirement to disclose the number of employees with a description of the registrant’s human capital resources, including in such description 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. The proposed amendment provides non-exclusive examples of human capital measures and objectives, such as measures or objectives that address the attraction, 301 The current Item 101(c) requirement to disclose the number of a registrant’s employees potentially would be encompassed by the proposed more expansive human capital resources disclosure topic. See supra Section II.B.7. 302 For example, some academic research has found that the introduction of a new product increases long-term financial performance of the company and firm value. See Dominique Hanssens, Koen Pauwels, Jorge Silva-Risso, and Shuba Srinivasan, New Products, Sales Promotions, and Firm Value: The Case of the Automobile Industry, 68 J. Marketing 142–56 (2004).and Amil Petrin, Quantifying the Benefits of New Products: The Case of the Minivan, 110 J. Pol. Econ. 705–29 (2002). Some academic research has also found that patents have a significant impact on firm-level productivity and market value. See Nicholas Bloom and John Van Reenen, Patents, Real Options and Firm Performance, 112 Econ. J. C97–C116 (2002), and Zvi Griliches, Market Value, R&D and Patents, 7 Econ. Letters 183–87 (1981). VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 development, and retention of personnel. In one meta-analysis, which reviewed 66 studies, the authors found that besides the number of employees, other human capital characteristics, including education, experience, and training,303 have positive effects on firm performance. Another author found that turnover rates reflect human resource management practices.304 Therefore, it is possible that investors may benefit from additional information elicited by the human capital topic. Registrants would incur incremental compliance costs to provide this additional information, if they determine that it is material. We also propose to replace the requirement to disclose the material effects on the registrant of compliance with environmental laws with a disclosure topic that covers the material effects of compliance with material government regulations, including environmental laws. To the extent that information about compliance with government regulations affects firm value, investors may benefit from additional information about the effects of material government regulations. Registrants, however, will incur incremental compliance costs to provide this information, if they determine that it is material to an understanding of their business. To the extent that many registrants already disclose such information, the incremental benefits and costs could be limited. Some of the disclosure requirements currently contained in Item 101(c) would not be included as potential topics in the revised rule.305 To the extent that the exclusion of these items results in a loss of material information,306 there may be costs to 303 See T. R. Crook, S. Y Todd, J. G. Combs, D. J. Woehr, & D. J. Ketchen Jr., Does human capital matter? A meta-analysis of the relationship between human capital and firm performance, 96 J. Appl. Psychol. 443–56 (2011). 304 See M.A. Huselid, The Impact of Human Resource Management Practices on Turnover, Productivity, and Corporate Financial Performance, 38 Acad. Manag. J. 635–672 (1995). 305 The proposed amendments would no longer list the following topics: Disclosure about new segments and dollar amount of backlog orders believed to be firm, in addition to working capital practices, which we discuss below. 306 An academic article shows that acquisition of new segments has significant effects on firm productivity. Firms diversifying into a new segment experience a net reduction in productivity. While productivity of new plants increases, incumbent plants suffer. See Antoinette Schoar, The Effect of Diversification on Firm Productivity, 62 J. Fin. 2379–2403 (2002). Another article shows that backlog orders can predict future earnings. See Siva Rajgopal, Terry Shevlin, and Mohan Venkatachalam, Does the Market Fully Appreciate the Implications of Leading Indicators for Future Earnings? Evidence from Order Backlog, 8 Rev. Acct. Stud. 461–492 (2003). Based on these studies, PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 44381 investors. However, we believe that any such costs would be limited given that, under the proposed principles-based approach, the list of disclosure topics is not exhaustive and registrants still would be required to provide disclosure about these topics if they are material to an understanding of the business. Additionally, in an effort to consolidate working capital disclosure in one location and to avoid duplicative disclosure, we propose not to include working capital practices as a potential topic in Item 101(c), with the expectation that working capital would be discussed in a registrant’s MD&A, to the extent material. If duplicative disclosure distracts investors from other important information, the proposal may benefit investors by reducing repetition and facilitating more efficient information processing. However, to the extent that information on working capital practices would no longer be readily available in multiple locations, investors may have to spend more time to retrieve the information. Registrants may marginally benefit from reduced compliance costs from the elimination of duplicative disclosure. Overall, investors and registrants may benefit from the proposed amendments to Item 101(c) if the existing requirements result in disclosure that is not material to an investment decision and/or is costly to provide. iii. Legal Proceedings (Item 103) Item 103 requires disclosure of material pending legal proceedings and other relevant information about the proceedings, such as the name of the court, the date instituted, and the principal parties involved. Given that involvement in legal proceedings can affect a firm’s cash flows through multiple channels, including legal fees, the cost of executives being distracted from their main operational tasks, reputational costs, and settlement costs, information required under Item 103 is relevant to firm value. Several studies also have found that the possibility of legal proceedings may affect corporate decisions, such as pricing of securities 307 and management’s information dissemination.308 one could anticipate that availability of material information on new segments and dollar amount of backlog orders believed to be firm could benefit investors. 307 See Michelle Lowry and Susan Shu, Litigation Risk and IPO Underpricing, 65 J. Fin. Econ. 309– 35 (2002) (finding that firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance, and underpricing by a greater amount lowers expected litigation costs). 308 See Douglas J. Skinner, Why Firms Voluntarily Disclose Bad News?, 32 J. Acct. Res. 38–60 (1994) E:\FR\FM\23AUP2.SGM Continued 23AUP2 44382 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 Therefore, investors might benefit if the proposal to update Item 103 results in more effective disclosure of material legal proceedings information. Currently, Item 103 and U.S. GAAP, which requires disclosure of certain loss contingencies, overlap in the requirement to disclose certain information associated with legal proceedings. As a result, in order to comply with Item 103, registrants commonly repeat disclosures that are already provided elsewhere in registration statements and periodic reports. We propose to revise Item 103 to encourage the use of hyperlinks or cross-references to avoid repetitive disclosure. If duplicative disclosure distracts investors from other important information, the proposal may benefit investors by reducing repetition and facilitating more efficient information processing. However, to the extent that some information on legal proceedings would no longer be readily available under Item 103, investors may have to spend more time to retrieve the information through hyperlinks or cross-references. However, we believe the increase in retrieval cost for investors would be minimal. While registrants may incur minimal compliance costs if they choose to include hyperlinks, we believe registrants would benefit from the proposal due to the potential reduction in costs to disclose duplicative information. Currently, Item 103 specifically requires disclosure of any proceedings under environmental laws to which a governmental authority is a party unless the registrant reasonably believes that the proceeding will result in monetary sanctions, exclusive of interest and costs, of less than $100,000. This brightline threshold for environmental proceedings was adopted in 1982. We propose to adjust the $100,000 threshold to $300,000 to account for the effects of inflation. Some research has found that environmental liabilities can influence certain corporate decisions related to managing environmental regulatory risk 309 and that some (suggesting that because shareholders are more likely to sue over earnings announcements with large negative returns, firms have an incentive to disclose bad earnings early in order to reduce the probability of being sued and the magnitude of damages). See also Joel F. Houston, Chen Lin, Sibo Liu, and Lai Wei, Litigation Risk and Voluntary Disclosure: Evidence from Legal Changes, Account. Rev. (forthcoming 2019) (finding a positive relation between the expectation of litigation and voluntary disclosure and suggesting that earnings forecast strategies are often designed to deter litigation). 309 See Dean Neu, Kathryn Pedwell, and Hussein Warsame, Managing Public Impressions: Environmental Disclosures in Annual Reports, 23 VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 investors include environmental criteria in their investment strategies.310 Therefore, the disclosure of environmental proceedings at the appropriate level might benefit investors who have a particular interest in environmental matters. The economic effects of increasing the disclosure threshold depend on investor preferences. In other words, if investors do not use information about environmental proceedings that result in sanctions smaller than $300,000 to inform investment decisions, the proposal may benefit investors since elimination of disclosure that investors do not use may facilitate more efficient information processing. If investors use such information, however, the proposal may have a cost to them. Since the proposed threshold is higher than the current threshold, registrants should benefit from reduced compliance costs. iv. 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. Some academic research supports the notion that information currently required under Item 105 is important to investors. For example, there is evidence that risk factor disclosure by publicly traded firms is material in content.311 There Acct. Org. & Soc’y 265–82 (1998) (using a matchedpair sample of publicly traded Canadian companies that have been subject to environmental fines and those that have not to analyze changes in pre-fine and post-fine environmental disclosure quality, and finding that environmental disclosure provides organizations with a method of managing potential discrediting events). See also Xin Chang, Kangkang Fu, Tao Li, Lewis Tam, and George Wong, Corporate Environmental Liabilities and Capital Structure (2018), available at https://ssrn.com/ abstract=3200991 (documenting that firms with higher environmental liabilities maintain lower financial leverage ratios and suggesting that environmental liabilities and financial liabilities are substitutionary). 310 See Steve Schueth, Socially Responsible Investing in the United States, 43 J. Bus. Ethics 189– 94 (2003) (providing an overview of the concept and practice of socially and environmentally responsible investing, describing the investment strategies practiced in the U.S., offering explanations for its growth, and examining who chooses to invest in a socially and environmentally responsible manner). See also Laura Starks, Parth Venkat, and Qifei Zhu, Corporate ESG profiles and investor horizons (2017), available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3049943 (finding that investors behave more patiently toward environmentally-responsible firms as they sell less after negative earnings surprises or poor stock returns). However, investors may derive value from characteristics of investments that are unrelated to financial performance, and these studies do not directly address whether environmental disclosures provide material information to investors. 311 See John L. Campbell, Hsinchun Chen, Dan S. Dhaliwal, Hsin-min Lu, and Logan B. Steele, The information content of mandatory risk factor PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 also is evidence suggesting that investors benefit from risk-factor disclosures that are more specific.312 In measuring long-run returns to IPO stocks, some studies conclude that the returns are commensurate with the risk profiles of the individual firms.313 Together, this research supports the notion that effective disclosures of risk factors can help investors better manage their risk exposure. We propose to amend Item 105 to require summary risk factor disclosure in the forepart of the document when the risk factor section exceeds 15 pages. If lengthy risk factor disclosure contains information that is less meaningful to investors, such as generic risks that could apply to any investment in securities, a summary of risk factors should benefit investors, especially those who have less time to review and analyze registrants’ disclosure, by enabling them to make more efficient investment decisions. The proposed threshold could also incentivize registrants to limit the length of their risk factor disclosure to 15 pages. Based on current disclosure practices, we estimate that a 15-page threshold would affect approximately 40 percent of registrants.314 In order to comply with disclosures in corporate filings, 19 Rev. Acct. Stud. 396–455 (2014) (finding that the required disclosures of risk factors in Form 10–K filings affect market beta, stock return volatility, information asymmetry, and firm value, and that firms that face more risks disclose correspondingly more in the risk factor discussion). 312 See Ole Kristian Hope, Danqi Hu and Hai Lu, The Benefits of Specific Risk-Factor Disclosures, 21 Rev. Acct. Stud. 1005–45 (2016) (finding that the market reaction to a Form 10–K filing is positively and significantly associated with specificity and suggesting that analysts are better able to assess fundamental risk when firms’ risk-factor disclosures are more specific). 313 See Bj<rn Eckbo and ;yvind Norli, Liquidity Risk, Leverage, and Long-Run IPO Returns, 11. J. Corp. Fin. 1–35 (2005) (constructing a portfolio of 6,000 IPO stocks and measure their returns in order to compare them with individual risk factors). The model for risk estimation includes several quantitative measures, as well as simple characteristic-based risks of the type disclosed in Forms S–1 and 10–K. The results indicate that the returns are likely fully justified by the increased risk of the IPO firms. 314 To estimate the percentage of registrants that would be affected by a 15-page threshold, we extracted all Forms S–1, S–3, S–4, S–11, 1–A, 10, and 10–K filed with the Commission during calendar year 2018. This population consists of approximately 10,000 forms. We then excluded Forms 10–K filed by smaller reporting companies and asset-backed issuers as well as Forms 10 filed by smaller reporting companies because they are not required to provide risk factor disclosure per Item 1A or Instruction J. Next, we constructed a random sample of 100 companies and calculated the length of their risk factor disclosure. The resulting page distribution had the mean of 15.26 and median of 13.5 pages. The 15-page threshold is around the 60th percentile of the distribution. Therefore, we estimate that this threshold would affect approximately 40 percent of registrants. E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 the proposed amendments, registrants may incur additional costs to summarize or shorten their risk factor disclosure. If registrants shorten their risk factor disclosure to avoid triggering the summary disclosure requirement, the disclosure might become less detailed. However, registrants that are providing lengthy risk factor disclosure to reduce potential litigation risks might be less likely to shorten the disclosure simply to avoid this requirement. We propose to update Item 105 to replace the requirement to discuss the ‘‘most significant’’ risks with ‘‘material’’ risks. The economic effects of the proposal depend on the preferences of investors. If the existing ‘‘most significant’’ standard elicits too much or too little information, investors may benefit from the proposed materiality standard. Focusing on the risks to which investors would attach the most importance should enable them to make more efficient investment decisions. Registrants may experience increased (decreased) compliance costs if the materiality standard results in more (less) expansive disclosure than the existing ‘‘most significant’’ standard. We propose to update Item 105 to require registrants to organize their risk factor disclosure under relevant headings, with generic risk factors, if disclosed, at the end of the section captioned as ‘‘General Risk Factors.’’ Some academic research has found that different types of registrants disclose different types of risk factors and certain types of risk factors are more correlated with stock return volatilities and systematic risks.315 Therefore, wellorganized risk factor disclosure that gives greater prominence to the most significant risks could benefit investors, especially those who have less time to review and analyze registrants’ disclosure, by enabling them to make more efficient investment decisions. Registrants may incur additional costs to organize their risk factor disclosure. Overall, the proposed amendments to Item 105 may benefit investors if they result in disclosure that is more likely to be material and concise. Registrants may incur additional costs to organize and summarize their risk factor disclosure. To the extent that registrants shorten their risk factor disclosure to avoid triggering the summary disclosure 315 See Ryan D. Israelsen, Tell It Like It Is: Disclosed Risks and Factor Portfolios (2014), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2504522 (using textual analysis techniques to extract a broad set of disclosed risk factors from firms’ SEC filings to examines characteristics of the firms most likely to make each type of disclosure, and investigating the relation between firms’ risk disclosures and their stock return volatilities and factor loadings). VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 requirement and investors valued the additional information, investors would incur costs associated with the loss of some information. C. Anticipated Effects on Efficiency, Competition, and Capital Formation As discussed above, the proposed amendments may improve capital allocation efficiency by enabling investors to make more efficient investment decisions. For example, the proposed amendments may reduce search costs for certain investors by eliminating information that is not material to those investors. Given that certain investors may have less time to review and analyze registrants’ disclosure,316 elimination of such information may facilitate more efficient investment decision making. In addition, permitting issuers to omit disclosure of information when it is not material may reduce issuer compliance costs, allowing issuers to deploy resources towards more productive uses and thus encouraging capital formation. The reduction in compliance costs might be particularly beneficial for smaller and younger issuers that are resource-constrained.317 However, in cases in which issuers misjudge what information is material, a principles-based disclosure framework relying on issuers’ determinations could result in increased information asymmetries between issuers and investors. Such asymmetries may increase the cost of capital, reduce capital formation, and hamper efficient allocation of capital across companies. Overall, to the extent that the proposed amendments would eliminate disclosure that is not considered to be material, we believe these effects would be limited. Moreover, we would expect this risk to be offset by mitigants including accounting controls and the antifraud provisions of the securities laws. 316 See David Hirshleifer and Siew Hong Teoh, Limited attention, information disclosure, and financial reporting, 36 J. Acct. & Econ. 337–86 (2003) (developinging a theoretical model where investors have limited attention and processing power and showing that, with partially attentive investors, the means of presenting information may have an impact on stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions). 317 We note, however, that, except for the elimination of the provision that requires smaller reporting companies to describe the development of their business during the last three years, smaller reporting companies that elect to provide the alternative business disclosure under Item 101(h) will continue to have mostly prescriptive requirements under the proposed amendments. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 44383 D. Alternatives We are proposing to revise Items 101(a), 101(c), and 105 to be more principles-based. As an alternative to this proposal, we considered modifying these requirements using prescriptive standards. A prescriptive standard could preserve the information investors currently receive while eliciting additional specific disclosures, may be easier to apply, and could enhance the comparability and verifiability of information. For example, in response to previous requests for comment, commenters advocated for additional specific disclosures about environmental and foreign regulatory risks, the number and types of employees, and business strategy. However, not all of these disclosures will be relevant at the same level of detail for all registrants. Given that the optimal levels of disclosure for business description and risk factors, in particular, are likely to vary greatly across registrants, a more flexible principles-based approach should be more likely to elicit the appropriate disclosures for these items. In addition, a prescriptive approach to a particular area of disclosure where the specified metric does not capture or does not fully capture the information likely to be material to an investment decision for a particular issuer or for comparable issuers may lead investors to rely on that metric for the issuer or as a comparative tool with respect to other issuers. We also are proposing to adjust for inflation the bright-line threshold for environmental proceedings in Item 103 from $100,000 to $300,000. As an alternative to this proposal, we considered applying a materiality standard. On the one hand, a materiality standard might elicit disclosure that is more relevant to a registrant’s operations. For example, the same dollar amount of environmental fines might have a significant impact on cash flows of a small registrant but a trivial impact on cash flows of a large registrant. On the other hand, the brightline threshold is easier to apply and could enhance comparability across registrants and over time. Given that some environmental proceedings can be factually and legally complex, a brightline threshold provides an easy-to-apply benchmark for registrants when determining whether a particular environmental proceeding should be disclosed. Another alternative is to adopt a lower or higher bright-line threshold than the one proposed. The optimal threshold depends on the preference of investors. For example, a E:\FR\FM\23AUP2.SGM 23AUP2 44384 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules jbell on DSK3GLQ082PROD with PROPOSALS2 lower bright-line threshold might be more appropriate if investors use information about environmental proceedings smaller than $300,000 to inform investment decisions. As another alternative, we considered revising Form 20–F so that certain of the proposed amendments would also apply to foreign private issuers.318 For example, we considered making the business disclosure requirements under Form 20–F, which are largely prescriptive, more principles based as we have proposed to do for domestic registrants. One advantage to similarly amending the business disclosure requirements under Form 20–F is that it would enable foreign registrants to realize the same expected benefits as domestic registrants by permitting them to tailor their disclosure to fit their own particular circumstances and reduce the amount of disclosure that is not material. However, this could reduce the ability of foreign private issuers to use a single disclosure document that would be accepted in multiple jurisdictions.319 More particularly, similar to our rule proposal for registrants filing on domestic forms, we considered amending Form 20–F to include as a business disclosure topic human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent material to an understanding of the registrant’s business. Such an amendment could impose additional costs in the short run for foreign private issuers, to the extent that this disclosure is not required in other jurisdictions. At the same time, investors could benefit from any additional information elicited by the human capital topic. We also considered amending Item 101(h), which permits a smaller reporting company to provide the disclosure about its business development and description of its business pursuant to that Item as an alternative to Items 101(a) and (c).320 We considered amending the disclosure requirements of Item 101(h), which are largely prescriptive, to make them more principles-based, similar to the approach proposed for Items 101(a) and (c). Such an amendment would enable smaller reporting companies to tailor 318 As previously explained, business disclosure for foreign private issuer registrants is governed by Part I of Form 20–F, and not by Item 101 of Regulation S–K. See supra note 23. The Commission amended Form 20–F in 1999 to conform in large part to the non-financial disclosure standards endorsed by IOSCO. See supra note 190 and accompanying text. 319 See supra note 191 and accompanying text. 320 See supra note 80. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 their business disclosure to fit their particular circumstances, which could help to eliminate information that is not material. Smaller reporting companies with less established reporting histories, however, may be the most at risk of persistent information asymmetries if the principles-based approach results in loss of information material to investors. As noted above, this risk would be offset by mitigants including accounting controls and antifraud provisions of the securities laws. E. Request for Comments In addition to the request for comments in Sections II and III of this release, we request comment on various aspects of the costs and benefits of our proposed amendments. We request comment from the point of view of investors, registrants, and other market participants. We are interested in comments on the analyses and conclusions of this Section and any effect the proposed amendments may have on efficiency, competition, and capital formation. We also request comments on alternatives presented in this release as well as any additional alternatives to the proposed amendments that should be considered. We appreciate any data or analysis that may help quantify the potential costs and benefits identified. In particular, we appreciate any data or analyses that would help understand the effects of using a higher or lower quantitative threshold for environmental proceedings. In addition, if the proposed materiality standards in this release diminish comparability among registrants, we appreciate any data or analyses on the costs associated with the loss of such comparability. V. Paperwork Reduction Act A. Summary of the Collections of Information Certain provisions of our rules, schedules, and forms that would be affected by the proposed amendments contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).321 The Commission is submitting the proposed amendments to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.322 The hours and costs associated with preparing, filing, and sending the schedules and forms constitute reporting and cost burdens imposed by each collection of information. An agency may not 321 44 322 44 PO 00000 U.S.C. 3501 et seq. U.S.C. 3507(d) and 5 CFR 1320.11. Frm 00028 Fmt 4701 Sfmt 4702 conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid OMB control number. Compliance with the information collections is mandatory. Responses to the information collections are not kept confidential and there is no mandatory retention period for the information disclosed. The titles for the collections of information are: ‘‘Regulation S–K’’ (OMB Control No. 3235–0071); 323 ‘‘Form S–1’’ (OMB Control No. 3235– 0065); ‘‘Form S–3’’ (OMB Control No. 3235– 0073); ‘‘Form S–4’’ (OMB Control No. 3235– 0324); ‘‘Form S–11’’ (OMB Control No. 3235–0067); ‘‘Form F–1’’ (OMB Control No. 3235– 0258); ‘‘Form F–3’’ (OMB Control No. 3235– 0256); ‘‘Form F–4’’ (OMB Control No. 3235– 0325); ‘‘Form SF–1’’ (OMB Control No. 3235–0707); ‘‘Form SF–3’’ (OMB Control No. 3235–0690); ‘‘Form 10’’ (OMB Control No. 3235– 0064); ‘‘Form 10–K’’ (OMB Control No. 3235–0063); ‘‘Form 10–Q’’ (OMB Control No. 3235–0070); ‘‘Schedule 14A’’ (OMB Control No. 3235–0059). We adopted all of the existing regulations, schedules, and forms pursuant to the Securities Act and the Exchange Act. The regulations, schedules, and forms set forth the disclosure requirements for registration statements, periodic reports, and proxy and information statements filed by registrants to help investors make informed investment and voting decisions. A description of the proposed amendments, including the need for the information and its proposed use, as well as a description of the likely respondents, can be found in Section II above, and a discussion of the economic effects of the proposed amendments can be found in Section IV above. B. Summary of the Proposed Amendments’ Effects on the Collections of Information The following table summarizes the estimated effects of the proposed 323 The paperwork burden for Regulation S–K is imposed through the forms that are subject to the requirements in this regulation and is reflected in the analysis of those forms. To avoid a PRA inventory reflecting duplicative burdens and for administrative convenience, we assign a one-hour burden to Regulation S–K. E:\FR\FM\23AUP2.SGM 23AUP2 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules amendments on the paperwork burdens 44385 associated with the affected forms listed in Section V.A. PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE PROPOSED AMENDMENTS Proposed amendments and effects Item 101(a): • More principles-based disclosure requirement, elimination of timeframe, and, for registration statements subsequent to the initial registration statement, requiring only an update with a hyperlink to the most recently filed disclosure that, together with the update, would present a complete discussion of the general development of a registrant’s business, would decrease the paperwork burden by reducing repetitive and immaterial information about a registrant’s business development. Estimated burden decrease: 3 hours per form; and, for Schedule 14A, 0.3 hour per schedule**. • Addition of material changes to business strategy as a potential disclosure topic could increase the paperwork burden for some registrants, although such increase is expected to be minimal as many registrants already provide such disclosure. Estimated burden increase: 1 hour per form; and, for Schedule 14A, 0.1 hour per schedule**. Item 101(c): • More principles-based disclosure requirement is expected to decrease the paperwork burden. Estimated burden decrease: 3 hours per form; and, for Schedule 14A, 0.3 hour per schedule**. • Addition of human capital resources/measures and objectives as potential disclosure topic would likely increase the paperwork burden. Estimated burden increase: 5 hours per form; and, for Schedule 14A, 0.5 hour per schedule**. • Addition of material government (and not just environmental) regulations as a potential disclosure topic could increase the paperwork burden for some registrants, although such increase is expected to be minimal as many registrants already provide such disclosure. Estimated burden increase: 1 hour per form; and, for Schedule 14A, 0.1 hour per schedule**. Item 103: • Expressly providing for the use of hyperlinks or cross-references is expected to decrease the paperwork burden by discouraging repetitive disclosure. Estimated burden decrease: 1 hour per form/schedule. • Raising the disclosure threshold for governmental environmental proceedings could also decrease the paperwork burden by reducing disclosure of immaterial proceedings. Estimated burden decrease: 2 hours per form/schedule. Item 105: • Summary risk factor disclosure provision could increase the paperwork burden for some registrants, although such increase is expected to be minimal as the summary would consist of a bulleted list. Estimated burden increase: 1 hour per form, except no increase for Form S–11,*** and 0.67 hour increase per form for Forms 10, 10–K, and 10–Q ±. • Summary risk factor disclosure provision could decrease the paperwork burden for other registrants to extent that it incentivizes registrants to provide streamlined risk factor disclosure focusing on the most salient risks. Estimated burden decrease: 4 hours per form, except no decrease for Form S–11,*** and 2.67 hour decrease per form for Forms 10, 10–K, and 10–Q ±. • ‘‘General Risk Factors’’ heading provision could marginally increase the paperwork burden. Estimated burden increase: 0.5 hour per form, except 0.33 hour increase per form for Forms 10, 10–K, and 10–Q ±. • Substitution of ‘‘material’’ risks for ‘‘most significant’’ risks could marginally decrease the paperwork burden. Estimated burden decrease: 0.5 hours per form, except 0.33 hour decrease per form for Forms 10, 10–K, and 10–Q ±. jbell on DSK3GLQ082PROD with PROPOSALS2 Total ................................................................................................................................ Affected forms Estimated net effect * • Forms S–1, S–4, 10, 10–K. • Schedule 14A .......... • 2 hour net decrease in compliance burden per form. • 0.2 hour net decrease in compliance burden per schedule. • Forms S–1, S–4, 10, 10–K. • Schedule 14A .......... • 3 hour net increase in compliance burden per form. • 0.3 hour net increase in compliance burden per schedule. Forms S–1, S–4, S– 11, 10, 10–K, 10–Q, Schedule 14A. 3 hour net decrease in compliance burden per form/schedule. • Forms S–1, S–3, S– 4, F–1, F–3, F–4, SF–1, SF–3. • Form S–11 .............. • Forms 10, 10–K, 10–Q. • 3 hour net decrease in compliance burden per form. • no change in compliance burden. • 2 hour net decrease in compliance burden per form. • Forms S–1, S–4 ...... • Forms S–3, S–11, F–1, F–3, F–4, SF– 1, SF–3. • Form 10, 10–K ........ • 10–Q ....................... • Schedule 14A .......... • 5 hour net decrease per form. • 3 hour net decrease per form. • 4 hour net decrease per form. • 5 hour net decrease per form. • 2.9 hour net decrease per schedule. * Estimated effect expressed as increase or decrease of burden hours on average and derived from staff review of samples of relevant sections of the affected forms. ** The lower estimated average incremental burden for Schedule 14A reflects the Commission staff estimate that no more than 10% of the Schedule 14As filed annually include Item 101 disclosures. *** Because Form S–11 already has a summary risk factor disclosure requirement, the proposed Item 105 amendment is not expected to affect the compliance burden for Form S–11 registrants. ± The reduced estimated average incremental burden for Forms 10, 10–K and 10–Q reflects the fact that smaller reporting companies, which comprise approximately one-third of the registrants filing those forms, are not required to provide Item 105 risk factor disclosure. VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 E:\FR\FM\23AUP2.SGM 23AUP2 44386 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments Below we estimate the incremental and aggregate reductions in paperwork burden as a result of the proposed amendments. These estimates represent the average burden for all registrants, both large and small. In deriving our estimates, we recognize that the burdens will likely vary among individual registrants based on a number of factors, including the nature of their business. We do not believe that the proposed amendments would change the frequency of responses to the existing collections of information; rather, we estimate that the proposed amendments would change only the burden per response. The burden reduction estimates were calculated by multiplying the estimated number of responses by the estimated average amount of time it would take a registrant to prepare and review disclosure required under the proposed amendments. For purposes of the PRA, the burden is to be allocated between internal burden hours and outside professional costs. The table below sets forth the percentage estimates we typically use for the burden allocation for each form. We also estimate that the average cost of retaining outside professionals is $400 per hour.324 PRA TABLE 2—STANDARD ESTIMATED BURDEN ALLOCATION FOR SPECIFIED FORMS AND SCHEDULES Forms 10–K, 10–Q, Schedule 14A ............................................................................................................. Forms S–1, S–3, S–4, S–11, F–1, F–3, F–4, SF–1, SF–3, and 10 ........................................................... The table below illustrates the incremental change to the total annual compliance burden of affected forms, in Outside professionals (percent) Internal (percent) Form/schedule type 75 25 25 75 hours and in costs, as a result of the proposed amendments. PRA TABLE 3—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES RESULTING FROM THE PROPOSED AMENDMENTS Form Number of estimated affected responses Burden hour reduction per current affected response Reduction in burden hours for current affected responses Reduction in company hours for current affected responses Reduction in professional hours for current affected responses Reduction in professional costs for current affected responses (A) 325 (B) (C) = (A) × (B) 326 (D) = (C) × 0.25 or 0.75 (E) = (C) × 0.75 or 0.25 (F) = (E) × $400 S–1 ............. S–3 ............. S–4 ............. S–11 ........... F–1 ............. F–3 ............. F–4 ............. SF–1 ........... SF–3 ........... 10 ............... 10–K ........... 10–Q .......... Sch. 14A .... 901 1,657 551 64 63 112 39 6 71 216 8,137 22,907 5,586 5 3 5 3 3 3 3 3 3 4 4 5 2.9 4,505 4,971 2,755 192 189 336 117 18 213 864 32,548 114,535 16,199 1,126 1,243 689 48 47 84 29 5 53 216 24,411 85,901 12,149 3,379 3,729 2,066 144 142 252 88 14 160 648 8,137 28,634 4,050 $1,351,600 1,491,600 826,400 57,600 56,800 100,800 35,200 5,600 64,000 259,200 3,254,800 11,453,600 1,620,000 Total .... 40,310 ............................... ........................................ 126,001 ........................................ 20,577,200 The following table summarizes the requested paperwork burden, including the estimated total reporting burdens and costs, under the proposed amendments. PRA TABLE 4—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS Current burden jbell on DSK3GLQ082PROD with PROPOSALS2 Form S–1 ................. S–3 ................. S–4 ................. Program change Current annual responses Current burden hours Current cost burden Number of affected responses (A) (B) (C) (D) 901 1,657 551 148,556 193,730 565,079 $182,048,700 236,322,036 678,291,204 324 We recognize that the costs of retaining outside professionals may vary depending on the nature of the professional services, but for purposes of this PRA analysis, we estimate that such costs would be an average of $400 per hour. This estimate is based on consultations with several registrants, law firms, and other persons who regularly assist VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 Requested change in burden Reduction in company hours Reduction in professional costs Annual responses Burden hours Cost burden (E) 327 (F) 328 (G) = (A) (H) = (B) + (E) (I) = (C) + (F) 901 1,657 551 1,126 1,243 689 $1,351,600 1,491,600 826,400 registrants in preparing and filing reports with the Commission. 325 The number of estimated affected responses is based on the number of responses in the Commission’s current OMB PRA filing inventory. The OMB PRA filing inventory represents a threeyear average. We do not expect that the proposed PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 901 1,657 551 147,430 192,487 564,390 $180,697,100 234,830,436 677,464,804 amendments will materially change the number of responses in the current OMB PRA filing inventory. 326 The estimated reductions in Columns (C), (D) and (E) are rounded to the nearest whole number. 327 From Column (D) in PRA Table 3. 328 From Column (F) in PRA Table 3. E:\FR\FM\23AUP2.SGM 23AUP2 44387 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules PRA TABLE 4—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS—Continued Current burden jbell on DSK3GLQ082PROD with PROPOSALS2 Form Program change Current annual responses Current burden hours Current cost burden Number of affected responses (A) (B) (C) (D) Requested change in burden Reduction in company hours Reduction in professional costs Annual responses Burden hours Cost burden (E) 327 (F) 328 (G) = (A) (H) = (B) + (E) (I) = (C) + (F) S–11 ............... F–1 ................. F–3 ................. F–4 ................. SF–1 .............. SF–3 .............. 10 ................... 10–K ............... 10–Q .............. Sch. 14A ........ 64 63 112 39 6 71 216 8,137 22,907 5,586 12,290 26,815 4,448 14,265 2,076 24,548 12,072 14,220,652 3,253,411 551,101 15,016,968 32,445,300 5,712,000 17,106,000 2,491,200 29,457,900 14,356,888 1,898,891,869 432,290,354 73,480,012 64 63 112 39 6 71 216 8,137 22,907 5,586 48 47 84 29 5 53 216 24,411 85,901 12,149 57,600 56,800 100,800 35,200 5,600 64,000 259,200 3,254,800 11,453,600 1,620,000 64 63 112 39 6 71 216 8,137 22,907 5,586 12,242 26,768 4,364 14,236 2,071 24,495 12,018 14,190,138 3,167,510 538,952 14,959,368 32,388,500 5,611,200 17,070,800 2,485,600 29,393,900 14,032,888 1,894,823,469 420,836,754 72,362,812 Total ........ 40,310 15,775,632 3,617,910,431 40,310 126,001 20,577,200 40,310 18,897,101 3,596,957,631 Request for Comment Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order to: • Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; • Evaluate the accuracy and assumptions and estimates of the burden of the proposed collection of information; • Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; • Evaluate whether there are ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and • Evaluate whether the proposed amendments would have any effects on any other collection of information not previously identified in this section. Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing these burdens. Persons submitting comments on the collection of information requirements should direct their comments to the Office of Management and Budget, Attention: Desk Officer for the U.S. Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy to, Vanessa A. Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File No. S7–11–19. Requests for materials submitted to OMB by the Commission with regard to the collection of information should be in writing, refer to File No. S7–11–19 and be submitted to the U.S. Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 Washington, DC 20549–2736. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this proposed rule. Consequently, a comment to OMB is best assured of having its full effect if the OMB receives it within 30 days of publication. VI. Regulatory Flexibility Act Certification When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (‘‘RFA’’) 329 requires the agency to prepare and make available for public comment an Initial Regulatory Flexibility Analysis (‘‘IRFA’’) that will describe the impact of the proposed rule on small entities.330 Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an IRFA, if the proposed rulemaking is not expected to have a significant economic impact on a substantial number of small entities.331 Although the rule proposal would have an impact on a substantial number of small entities,332 the Commission expects that the impact on entities affected by the proposed rule would not be significant.333 The primary effects of the rule proposal would be to: (1) Increase the flexibility for an entity when providing disclosure regarding its business, including its general business development, so that it can tailor its disclosure to its particular circumstances; (2) eliminate or reduce disclosure about matters that are not material to an understanding of the business or to an entity’s legal proceedings; and (3) encourage risk factor disclosure that is shorter and concerns only material risks. As a result U.S.C. 601 et seq. U.S.C. 603(a). 331 5 U.S.C. 605(b). 332 Approximately 2,283, or 33%, of the registrants filing on domestic forms in 2018 were small entities. See supra Section IV.A. 333 See Section IV.B. of these effects, we expect that the impact of the rule proposal would be a reduction in the paperwork burden of affected entities, including small entities, and that the overall impact of the paperwork burden reduction would be modest and would be beneficial to small entities.334 Accordingly, the Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed amendments to Items 101, 103, and 105 of Regulation S–K, if adopted, would not have a significant economic impact on a substantial number of small entities for purposes of the RFA. Request for Comment We request comment on this certification. In particular, we solicit comment on the following: Do commenters agree with the certification? If not, please describe the nature of any impact of the proposed amendments on small entities and provide empirical data to illustrate the extent of the impact. Such comments will be considered in the preparation of the final rules (and in a Final Regulatory Flexibility Analysis if one is needed) and, if the proposed rules are adopted, will be placed in the same public file as comments on the proposed rules themselves. VII. Small Business Regulatory Enforcement Fairness Act For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),335 the Commission must advise OMB as to whether the proposed amendments constitute a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results or is likely to result in: 329 5 330 5 PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 334 We estimate that the proposed amendments are likely to result in a net decrease of between three and five burden hours per form for purposes of the Paperwork Reduction Act. See supra Section V.B. 335 5 U.S.C. 801 et seq. E:\FR\FM\23AUP2.SGM 23AUP2 44388 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules • An annual effect on the U.S. economy of $100 million or more (either in the form of an increase or a decrease); • A major increase in costs or prices for consumers or individual industries; or • Significant adverse effects on competition, investment, or innovation. We request comment on whether the proposed amendments would be a ‘‘major rule’’ for purposes of SBREFA. In particular, we request comment on the potential effect of the proposed amendments on the U.S. economy on an annual basis; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. VIII. Statutory Authority and Text of Proposed Rule and Form Amendments The amendments contained in this release are being proposed under the authority set forth in Sections 7, 10, and 19(a) of the Securities Act, as amended, and Sections 3, 12, 13, 15, and 23(a) of the Exchange Act, as amended. List of Subjects in 17 CFR Parts 229, 239, and 240 Reporting and recordkeeping requirements, Securities. Text of the Proposed Amendments In accordance with the foregoing, the Commission is proposing to amend title 17, chapter II of the Code of Federal Regulations as follows: PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975— REGULATION S–K 1. The authority citation for part 229 continues to read as follows: jbell on DSK3GLQ082PROD with PROPOSALS2 ■ Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j–3, 78l, 78m, 78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 80a– 31(c), 80a–37, 80a–38(a), 80a–39, 80b–11 and 7201 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111–203, 124 Stat. 1904 (2010); and sec. 102(c), Pub. L. 112–106, 126 Stat. 310 (2012). 2. Amend § 229.101 by: a. Revising paragraphs (a) introductory text and (a)(1); ■ b. Redesignating paragraph (a)(2) as paragraph (a)(3); ■ c. Adding new paragraph (a)(2); and ■ ■ VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 d. Revising paragraphs (c) and (h) introductory text. The revisions and addition read as follows: ■ § 229.101 (Item 101) Description of business. (a) General development of business. Describe the general development of the business of the registrant, its subsidiaries, and any predecessor(s). (1) In describing developments, only information material to an understanding of the general development of the business is required. Disclosure may include, but should not be limited to, the following topics: (i) Transactions and events that affect or may affect the company’s operations, including material changes to a previously disclosed business strategy; (ii) Bankruptcy, receivership, or any similar proceeding; (iii) The nature and effects of any material reclassification, merger or consolidation of the registrant or any of its significant subsidiaries; and (iv) The acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business. (2) For filings other than initial registration statements, a full discussion of the general development of the registrant’s business is not required. For such filings, an update to the general development of the business disclosure with a focus on material developments in the reporting period may be provided instead of a full discussion. If a full discussion of the general development of the registrant’s business is not included, pursuant to § 230.411 or § 240.12b–23 of this chapter as applicable, incorporate by reference, and include an active hyperlink to, the registrant’s most recently filed disclosure that, together with the update, would present the full discussion of the general development of its business. * * * * * (c) Description of business. (1) Describe 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. When describing each segment, include the information specified in paragraphs (c)(1)(i) through (v) of this section, to the extent such information is material to an understanding of the business taken as a whole. (i) Revenue-generating activities, products and/or services, and any dependence on revenue-generating activities, key products, services, PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 product families or customers, including governmental customers; (ii) Status of development efforts for new or enhanced products, trends in market demand and competitive conditions; (iii) Resources material to a registrant’s business, such as: (A) Sources and availability of raw materials; and (B) The duration and effect of all patents, trademarks, licenses, franchises and concessions held; (iv) 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; and (v) The extent to which the business is or may be seasonal. (2) Discuss the information specified in paragraphs (c)(2)(i) and (ii) of this section with respect to, and to the extent material to an understanding of, the registrant’s business taken as a whole, except that, if the information is material to a particular segment, you should additionally identify that segment. (i) The material effects that compliance with material government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries. Include in such disclosure material estimated capital expenditures for environmental control facilities for the current fiscal year and any other subsequent period that the registrant deems material; and (ii) 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 (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel). * * * * * (h) Smaller reporting companies. A smaller reporting company, as defined by § 229.10(f)(1), may satisfy its obligations under this Item by describing the development of its business pursuant to this paragraph (h), except that, for filings other than initial registration statements, a smaller reporting company may provide an update to the general development of the business disclosure, instead of a full discussion, which complies with paragraph (a)(2) of this section. If the smaller reporting company has not been in business for three years, give the same information for predecessor(s) of E:\FR\FM\23AUP2.SGM 23AUP2 44389 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules the smaller reporting company if there are any. This business development description should include: * * * * * ■ 3. Revise § 229.103 to read as follows: jbell on DSK3GLQ082PROD with PROPOSALS2 § 229.103 (Item 103) Legal proceedings. (a) Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceedings and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities. Information may be provided by hyperlink or crossreference to legal proceedings disclosure elsewhere in the document, such as in Management’s Discussion & Analysis (MD&A), Risk Factors and notes to the financial statements. (b) No information need be given under this section for proceedings: (1) That involve negligence or other claims or actions if the business ordinarily results in such claims or actions, unless the claim or action departs from the normal kind of such claims or actions; or (2) That involve primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis. However, if any proceeding presents in large degree the same legal or factual issues as other proceedings pending or known to be contemplated, the amount involved in such other proceedings shall be included in computing such percentage. (c) Notwithstanding paragraph (b) of this section, disclosure under this section shall include, but shall not be limited to: (1) Any material bankruptcy, receivership, or similar proceeding with respect to the registrant or any of its significant subsidiaries; (2) Any material proceedings to which any director, officer or affiliate of the registrant, any owner of record or beneficially of more than five percent of any class of voting securities of the registrant, or any associate of any such director, officer, affiliate of the registrant, or security holder is a party adverse to the registrant or any of its subsidiaries or has a material interest adverse to the registrant or any of its subsidiaries; VerDate Sep<11>2014 17:44 Aug 22, 2019 Jkt 247001 (3) Administrative or judicial proceedings (including proceedings which present in large degree the same issues) arising under any Federal, State, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment. Such proceedings shall not be deemed ‘‘ordinary routine litigation incidental to the business’’ and shall be described if: (i) Such proceeding is material to the business or financial condition of the registrant; (ii) Such proceeding involves primarily a claim for damages, or involves potential monetary sanctions, capital expenditures, deferred charges or charges to income and the amount involved, exclusive of interest and costs, exceeds 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis; or (iii) A governmental authority is a party to such proceeding and such proceeding involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $300,000; provided, however, that such proceedings which are similar in nature may be grouped and described generically. ■ 4. Revise § 229.105 to read as follows: § 229.105 (Item 105) Risk factors. (a) Where appropriate, provide under the caption ‘‘Risk Factors’’ a discussion of the material factors that make an investment in the registrant or offering speculative or risky. This discussion must be organized logically with relevant headings and each risk factor should be set forth under a subcaption that adequately describes the risk. The presentation of risks that could apply generically to any registrant or any offering is discouraged, but to the extent generic risk factors are presented, disclose them at the end of the risk factor section under the caption ‘‘General Risk Factors.’’ (b) Concisely explain how each risk affects the registrant or the securities being offered. If the discussion is longer than 15 pages, include in the forefront of the prospectus or annual report, as applicable, a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky. If the risk factor discussion is included in a registration statement, it must immediately follow the summary section. If you do not include a PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately follows the cover page. Pricing information means price and pricerelated information that you may omit from the prospectus in an effective registration statement based on Rule 430A (§ 230.430A of this chapter). The registrant must furnish this information in plain English. See § 230.421(d) of Regulation C of this chapter. PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 5. The authority citation for part 239 continues to read as follows: ■ Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o–7 note, 78u–5, 78w(a), 78ll, 78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– 10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30, and 80a–37; and sec. 107, Pub. L. 112–106, 126 Stat. 312, unless otherwise noted. * * * * * 6. Amend Form S–4 (referenced in § 239.25) by revising paragraph (b)(3)(i) of Item 12 under Part I, Section B (‘‘Information About the Registrant’’) to read as follows: Note: The text of Form S–4 does not, and this amendment will not, appear in the Code of Federal Regulations. ■ United States Securities and Exchange Commission Washington, DC 20549 Form S–4 Registration Statement Under the Securities Act of 1933 * * * * * Part I Information Required in the Prospectus * * * * * B. Information About the Registrant * * * * * Item 12. Information with Respect to S–3 Registrants. * * * * * (b) * * * (3) Furnish the information required by the following: (i) Item 101(c)(1)(i) of Regulation S–K (§ 229.101(c)(1)(i) of this chapter), industry segments, key products or services; * * * * * PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 7. The authority citation for part 240 continues to read as follows: ■ E:\FR\FM\23AUP2.SGM 23AUP2 44390 Federal Register / Vol. 84, No. 164 / Friday, August 23, 2019 / Proposed Rules Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub. L. 111–203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 112–106, 126 Stat. 326 (2012), unless otherwise noted. jbell on DSK3GLQ082PROD with PROPOSALS2 * * * VerDate Sep<11>2014 * * 17:44 Aug 22, 2019 Jkt 247001 ■ 8. Amend § 240.14a–101 by revising paragraph (a) of Item 7 of Schedule 14A to read as follows: respect to directors and executive officers. * * * * * § 240.14a–101 Schedule 14A. Information required in proxy statement. By the Commission. Dated: August 8, 2019. Vanessa A. Countryman, Secretary. * * * * * Item 7. Directors and executive officers. * * * (a) The information required by Item 103(c)(2) of Regulation S–K (§ 229.103(c)(2) of this chapter) with PO 00000 Frm 00034 Fmt 4701 Sfmt 9990 [FR Doc. 2019–17410 Filed 8–22–19; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\23AUP2.SGM 23AUP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 164 (Friday, August 23, 2019)]
[Proposed Rules]
[Pages 44358-44390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17410]



[[Page 44357]]

Vol. 84

Friday,

No. 164

August 23, 2019

Part II





Securities and Exchange Commission





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17 CFR Parts 229, 239, and 240





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

Federal Register / Vol. 84 , No. 164 / Friday, August 23, 2019 / 
Proposed Rules

[[Page 44358]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR 229, 239, and 240

[Release Nos. 33-10668; 34-86614; File No. S7-11-19]
RIN 3235-AL78


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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing for public comment 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 proposed amendments are intended to update our rules to 
account for developments since their adoption or last amendment, to 
improve these disclosures for investors, and to simplify compliance 
efforts for registrants. Specifically, the proposed amendments are 
intended to improve the readability of disclosure documents, as well as 
discourage repetition and disclosure of information that is not 
material.

DATES: Comments should be received on or before October 22, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-11-19 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-11-19. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on our internet website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for 
website viewing and printing in our Public Reference Room, 100 F Street 
NE, Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly.
    We or the staff may add studies, memoranda, or other substantive 
items to the comment file during this rulemaking. A notification of the 
inclusion in the comment file of any such materials will be made 
available on our website. To ensure direct electronic receipt of such 
notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Sandra Hunter Berkheimer or Elliot 
Staffin, 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: We are proposing to amend 17 CFR 229.101 
(``Item 101''), 17 CFR 229.103 (``Item 103''), and 17 CFR 229.105 
(``Item 105'') of 17 CFR 229.10 et seq. (``Regulation S-K'') under the 
Securities Act of 1933 (the ``Securities Act'') and the Securities 
Exchange Act of 1934 (the ``Exchange Act'').

Table of Contents

I. Introduction and Background
II. Description of the Proposed Amendments
    A. General Development of Business (Item 101(a))
    B. Narrative Description of Business (Item 101(c))
    C. Legal Proceedings (Item 103)
    D. Risk Factors (Item 105)
III. General Request for Comments
IV. Economic Analysis
    A. Baseline and Affected Parties
    B. Potential Costs and Benefits
    C. Anticipated Effects on Efficiency, Competition, and Capital 
Formation
    D. Alternatives
    E. Request for Comments
V. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Summary of the Proposed Amendments' Effects on the 
Collections of Information
    C. Incremental and Aggregate Burden and Cost Estimates for the 
Proposed Amendments
VI. Regulatory Flexibility Act Certification
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority and Text of Proposed Rule and Form 
Amendments

I. Introduction and Background

    We are proposing amendments to modernize the description of 
business (Item 101), legal proceedings (Item 103), and risk factor 
(Item 105) disclosure requirements in Regulation S-K. We are proposing 
amendments to these items to improve these disclosures for investors 
and to simplify compliance for registrants.\1\
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    \1\ The proposed amendments are also consistent with and further 
promote 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). In the Report 
on Modernization and Simplification of Regulation S-K, the staff 
recommended that the Commission consider combining the description 
of material physical properties required in Item 102 with the 
description of business in Item 101(c). See Report on Modernization 
and Simplification of Regulation S-K (Nov. 23, 2016), available at 
https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf. The 
Commission considered the staff recommendation, but did not propose 
to combine Item 102 with Item 101. See FAST Act Modernization and 
Simplification of Regulation S-K, Release No. 33-10425 ((Oct. 11, 
2017) [82 FR 50988 (Nov. 2, 2017)]. Instead, the Commission adopted 
amendments to Item 102 to emphasize the materiality standard 
applicable to that disclosure, while preserving the industry-
specific instructions to that Item. See FAST Act Modernization and 
Simplification of Regulation S-K, Release No. 33-10618 (Mar. 20, 
2019) [84 FR 12674 (April 2, 2019)] (``FAST Act Adopting Release''). 
We believe that, in light of our proposed amendments to Item 101, 
combining the two items would not improve registrants' business 
disclosure or simplify compliance.
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    Pursuant to Section 108 of the Jumpstart Our Business Startups Act 
(``JOBS Act''),\2\ the Commission staff prepared the Report on Review 
of Disclosure Requirements in Regulation S-K (``S-K Study''),\3\ 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'').\4\ The overall objective of the Disclosure Effectiveness 
Initiative is to improve our disclosure regime for both investors and 
registrants.
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    \2\ 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.
    \3\ 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'').
    \4\ See SEC Spotlight on Disclosure Effectiveness, available at 
https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.

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[[Page 44359]]

    In connection with the S-K Study and the launch of the Disclosure 
Effectiveness Initiative, the Commission staff received public input on 
how to improve registrant disclosures.\5\ In a separate Concept Release 
issued in 2016,\6\ the Commission staff revisited the business and 
financial disclosure requirements in Regulation S-K and requested 
public comment on whether they provide the information that investors 
need to make informed investment and voting decisions, and whether any 
of our rules have become outdated or unnecessary.
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    \5\ In connection with the S-K Study, we received public 
comments on regulatory initiatives to be undertaken in response to 
the JOBS Act. See Comments on SEC Regulatory Initiatives Under the 
JOBS Act: Title I--Review of Regulation S-K, available at https://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml. 
To facilitate public input on the Disclosure Effectiveness 
Initiative, members of the public were invited to submit comments. 
See Request for Public Comment, available at https://www.sec.gov/spotlight/disclosure-effectiveness.shtml. Public comments received 
to date on the topic of Disclosure Effectiveness are available on 
our website. See Comments on Disclosure Effectiveness, available at 
https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml. We refer to these letters throughout 
as ``Disclosure Effectiveness'' letters.
    \6\ 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'').
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    In developing the proposed amendments, we considered input from 
comment letters we received in response to these disclosure 
modernization efforts.\7\ 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.
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    \7\ Unless otherwise indicated, comments cited in this release 
are to the public comments on the Concept Release, supra note 6, 
which are available at https://www.sec.gov/comments/s7-06-16/s70616.htm.
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    Regulation S-K was adopted in 1977 to foster uniform and integrated 
disclosure for registration statements under both the Securities Act 
and the Exchange Act, and other Exchange Act filings, including 
periodic and current reports.\8\ In 1982, the Commission expanded and 
reorganized Regulation S-K to be the central repository for its non-
financial statement disclosure requirements.\9\ The Commission's goals 
in adopting integrated disclosure were to revise or eliminate 
overlapping or unnecessary disclosure requirements wherever possible, 
thereby reducing burdens on registrants and enhancing readability 
without affecting the provision of information material to an 
investment decision.\10\
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    \8\ The Commission adopted the initial version of Regulation S-K 
following issuance of the report by the Advisory Committee on 
Corporate Disclosure led by former Commissioner A.A. Sommer, Jr., 
which recommended adoption of a single integrated disclosure system. 
See Report of the Advisory Committee on Corporate Disclosure to the 
Securities and Exchange Commission, Cmte. Print 95-29, House Cmte. 
On Interstate and Foreign Commerce, 95th Cong., 1st. Sess (Nov. 3, 
1977) (``Report of the Advisory Committee''), available at https://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1970/1977_1103_AdvisoryDisclosure.pdf. This version of 
Regulation S-K included only two disclosure requirements--a 
description of business and a description of properties. See Concept 
Release, supra note 6, and accompanying text.
    \9\ See Adoption of Integrated Disclosure System, Release No. 
33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (``1982 
Integrated Disclosure Adopting Release'').
    \10\ See id.
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    The Commission adopted line-item requirements in Regulation S-K to 
elicit specific disclosure within broad categories of information 
material to an investment decision. Some of these requirements provide 
registrants with the flexibility to determine the disclosure that is 
material to an investment decision.\11\ These disclosure requirements 
are often referred to as ``principles-based'' because they articulate a 
disclosure concept rather than a specific line-item requirement.\12\ 
Principles-based rules rely on a registrant's management to evaluate 
the significance of information in the context of the registrant's 
overall business and financial circumstances and to determine whether 
disclosure is necessary.\13\ As the Commission stated in the Concept 
Release, emphasizing principles-based disclosure may allow a registrant 
to more effectively tailor its disclosure to provide the information 
about its specific business and financial condition that is material to 
an investment decision and in turn may reduce the amount of disclosure 
that may be irrelevant, outdated or immaterial.\14\
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    \11\ On several occasions, the Commission has reiterated that 
its requirements seek disclosure of information material to an 
investment decision. See, e.g., Commission Guidance Regarding 
Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 8, 
2010) [75 FR 6290 (Feb. 8, 2010)] (``Climate Change Release'') at 
6292-6293 (reiterating that information is material if there is a 
substantial likelihood that a reasonable investor would consider it 
important in deciding how to vote or make an investment decision, 
or, put another way, if the information would alter the total mix of 
available information); Statement of the Commission Regarding 
Disclosure of Year 2000 Issues and Consequences by Public Companies, 
Investment Advisers, Investment Companies, and Municipal Securities 
Issuers, Release No. 33-7558 (July 29, 1998) [63 FR 41394 (Aug. 4, 
1998)] at 41395 (stating that our disclosure framework requires 
companies to disclose material information that enables investors to 
make informed investment decisions).
    \12\ See Executive Compensation and Related Person Disclosure, 
Release No. 33-8732A (Aug. 29, 2006) [71 FR 53157 (Sept. 8, 2006)] 
(``As described in the Proposing Release and as adopted, the 
Compensation Discussion and Analysis requirement is principles-
based, in that it identifies the disclosure concept and provides 
several illustrative examples.'').
    \13\ See Report of the Advisory Committee, supra note 8 
(``Although the initial materiality determination is management's, 
this judgment is, of course, subject to challenge or question by the 
Commission or in the courts.'').
    \14\ See Concept Release, supra note 6.
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    In contrast, some line-item requirements in Regulation S-K employ 
bright-line, quantitative thresholds to specify when disclosure is 
required, or require all registrants to disclose the same type of 
information. These requirements are sometimes referred to as 
``prescriptive'' disclosure requirements because they do not rely on 
management's judgment to determine when disclosure is required. The 
benefits of prescriptive disclosure requirements can include 
comparability, consistency, and ease in determining when information 
must be disclosed.\15\
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    \15\ See id. For a discussion of the potential economic effects 
of switching from a prescriptive to a more principles-based 
disclosure requirement, including a potential loss of comparability, 
see infra Sections IV.B.1 and 2 and IV.D.
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    The Concept Release sought input on whether our disclosure 
requirements should be more principles-based, prescriptive, or a 
combination of both. Many commenters supported a more principles-based 
approach \16\ while

[[Page 44360]]

other commenters supported some combination of both principles-based 
and prescriptive rules.\17\
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    \16\ See letters from R.G. Associates, Inc. (July 6, 2016) 
(``RGA''), American Bankers Association (July 15, 2016), Deloitte & 
Touche LLP (July 15, 2016) (``Deloitte''), New York State Society of 
Certified Public Accountants (July 19, 2016) (``NYSSCPA''), U.S. 
Chamber of Commerce (July 20, 2016) (``Chamber''), BDO USA LLP (July 
20, 2016) (``BDO''), Corporate Governance Coalition for Investor 
Value (July 20, 2016) (``CGCIV''), International Integrated 
Reporting Council (July 20, 2016) (``IIRC''), Railpen Investments 
(July 21, 2016) (``Railpen''), National Association of Manufacturers 
(July 21, 2016) (``NAM''), American Chemistry Council (July 19, 
2016) (``ACC''), The American Petroleum Institute (July 21, 2018) 
(``API''), Business Roundtable (July 21, 2016), UnitedHealth Group, 
Inc. (July 21, 2016) (``United Health''), Center for Audit Quality 
(July 21, 2016) (``CAQ''), Securities Industry and Financial Markets 
Association (July 21, 2016) (``SIFMA''), Ernst & Young LLP (July 21, 
2016) (``E&Y''), PNC Financial Services Group (July 21, 2016) 
(``PNC''), Edison Electric Institute and American Gas Association 
(July 21, 2016) (``EEI and AGA''), Grant Thornton LLP (July 21, 
2016) (``Grant''), KPMG LLP (July 21, 2016) (``KPMG''), 
PricewaterhouseCoopers LLP (July 21, 2016) (``PWC''), Cornerstone 
Capital Inc. (July 21, 2016) (``Cornerstone''), Crowe Horwath LLP 
(July 21, 2016) (``Crowe''), America Gas Association (July 21, 2016) 
(``AGA''), Prologis, Inc. (July 21, 2016) (``Prologis''), National 
Association of Real Estate Investment Trusts (July 21, 2016) 
(``NAREIT''), Allstate Insurance Company (July 21, 2016) 
(``Allstate''), Davis Polk & Wardwell LLP (July 22, 2016) 
(``Davis''), Chevron Corporation (July 22, 2016) (``Chevron''), 
Fenwick West LLP (Aug. 1, 2016) (``Fenwick''), Reardon Firm (Aug. 3, 
2016) (``Reardon''), National Investor Relations Institute (Aug. 4, 
2016) (``NIRI''), Sullivan & Cromwell LLP (Aug. 9, 2016), Exxon 
Mobil Corporation (Aug. 9, 2016), FedEx Corporation (July 21, 2016) 
(``FedEx''), Institute of Management Accountants (July 29, 2016), 
Shearman & Sterling LLP (Aug. 31, 2016) (``Shearman''), Nasdaq, Inc. 
(Sept. 16, 2016) (``Nasdaq''), Northrop Grumman Corporation (Sept. 
27, 2016), General Motors Company (Sept. 30, 2016) (``General 
Motors'') and Financial Executives International (Oct. 3, 2016) 
(``Financial Executives International'').
    \17\ See letters from Council of Institutional Investors (July 
8, 2016) (``CII''), Railpen, New York State Comptroller (July 21, 
2016) (``NYSC''), California State Teachers' Retirement System (July 
21, 2016) (``CalSTRS''), Pension Investment Association of Canada 
(July 17, 2016), Medical Benefits Trust (July 15, 2016) (``Medical 
Benefits Trust''), Principles for Responsible Investment (July 19, 
2016) (``PRI''), Legal & General Investment Management (July 20, 
2016) (``LGIM''), Walden Asset Management (July 19, 2016) 
(``Walden''), SEC Investor Advisory Committee (June 15, 2016) 
(``IAC''), AFLAC (July 19, 2016) (``AFLAC''), Domini Social 
Investments LLC (July 21, 2016) (``Domini Social''), NYC Comptroller 
(July 21, 2016) (``NYC Comptroller''), AFL-CIO (July 21, 2016) 
(``AFL-CIO''), California Public Employees' Retirement System (July 
21, 2016) (``CalPERS''), British Columbia Investment Management 
Corporation (July 21, 2016), Stephen Percoco (July 24, 2016) (``S. 
Percoco''), Americans for Financial Reform (Aug. 10, 2016) 
(``Americans for Financial Reform'') and CFA Institute (Oct. 6, 
2016) (``CFA Institute''). Four commenters supported a combination 
that emphasized a principles-based approach (Walden, AFLAC, Ball 
Corporation (July 19, 2016) (``Ball Corporation'') and S. Percoco) 
and seven commenters supported a combination that emphasized a 
prescriptive approach (IAC, NYC Comptroller, American Federation of 
State, County and Municipal Employees (July 21, 2016) (``AFSCME''), 
Maryland State Bar Association (July 21, 2016) (``Maryland Bar 
Securities Committee''), AFL-CIO, Americans for Financial Reform and 
CFA Institute).
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    We are proposing amendments to Items 101, 103, and 105 \18\ in 
light of the many changes that have occurred in our capital markets and 
the domestic and global economy in the more than 30 years since their 
adoption, including changes in the mix of businesses that participate 
in our public markets, changes in the way businesses operate, which may 
affect the relevance of current disclosure requirements, changes in 
technology (in particular the availability of information), and changes 
such as inflation that have occurred simply with the passage of 
time.\19\ For example, Item 101 mandates certain disclosures that may 
be outdated while Item 103 includes a dollar threshold for proceedings 
related to environmental protection laws that was set in 1982.\20\ 
Further, numerous commenters cited the risk factor disclosure 
requirements as needing improvement.\21\ We believe that modernizing 
these disclosure items would result in improved disclosure, tailored to 
reflect registrants' particular circumstances, and reduce disclosure 
costs and burdens.
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    \18\ The Commission recently rescinded Item 503(c) of Regulation 
S-K and replaced it with new Item 105 of Regulation S-K. See FAST 
Act Adopting Release, supra note 1.
    \19\ See infra note 279 (noting that while Items 101, 103, and 
105 have not undergone significant revisions in over 30 years, many 
characteristics of the registrants have changed substantially over 
this time period).
    \20\ See id.
    \21\ See, e.g., letters from CAQ, AFLAC, Chamber, FedEx, CGCIV, 
NAM, ACC, SIFMA, E&Y, EEI and AGA, Wilson Sonsini Goodrich & Rosati 
(July 21, 2016) (``Wilson Sonsini''), NAREIT, Davis, Fenwick, NIRI, 
Shearman, PWC, General Motors, and Financial Executives 
International.
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    For each of the disclosure requirements addressed in this release, 
we considered the merits and drawbacks of pursuing a principles-based 
versus prescriptive approach. We also considered each requirement as a 
component of a broader framework that will achieve the disclosure 
objectives of the Securities Act and the Exchange Act in the most 
effective and efficient manner. As discussed in greater detail in 
Section II below, we propose to revise Items 101(a) (description of the 
general development of the business), 101(c) (narrative description of 
the business), and 105 (risk factors) to emphasize a principles-based 
approach because the current disclosure requirements may not reflect 
what is material to every business, and, as past developments have 
demonstrated, disclosure requirements, and in particular prescriptive 
disclosure requirements, can become outdated in these areas. We believe 
this approach would elicit more relevant disclosures about these items. 
In contrast, we are proposing a more prescriptive approach for Item 103 
because that requirement depends less on the specific characteristics 
of individual registrants.
    Our proposed amendments would: \22\
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    \22\ We are also proposing amendments to Item 101(h) of 
Regulation S-K [17 CFR 229.101(h)], which permits a smaller 
reporting company to fulfill its disclosure obligations under Item 
101, including with respect to its business development, by 
providing the disclosure specified under paragraph (h). ``Smaller 
reporting company'' is defined in 17 CFR 229.10(f) 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: (i) Had a public float of 
less than $250 million; or (ii) had annual revenues of less than 
$100 million and either: (A) No public float; or (B) a public float 
of less than $700 million. Business development companies, which are 
a type of investment company, are not eligible to be smaller 
reporting companies. See, e.g., Smaller Reporting Company Regulatory 
Relief and Simplification, Release No. 33-8819 [(July 5, 2007) [72 
FR 39670 (July 19, 2007)], at 39674.
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     Revise Item 101(a) to be largely principles-based, 
requiring:
    [cir] Disclosure of information material \23\ to an understanding 
of the general development of the business and eliminating a prescribed 
timeframe for this disclosure; and
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    \23\ 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. 
See supra note 14 and accompanying text.
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    [cir] In filings made after a registrant's initial filing, only an 
update of the general development of the business with a focus on 
material developments in the reporting period with a hyperlink to the 
registrant's most recent filing (e.g., initial registration statement 
or more recent filing if one exists) that, together with the update, 
would contain the full discussion of the general development of the 
registrant's business.
     Revise Item 101(c) to:
    [cir] Clarify and expand its principles-based approach, with 
disclosure topics drawn from a subset of the topics currently contained 
in Item 101(c);
    [cir] Include, as a disclosure topic, human capital resources, 
including 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; and
    [cir] Refocus the regulatory compliance requirement by including 
material government regulations, not just environmental laws, as a 
topic.
     Revise Item 103 to:
    [cir] Expressly state that the required information may be provided 
by including hyperlinks or cross-references to legal proceedings 
disclosure located elsewhere in the document in an effort to encourage 
registrants to avoid duplicative disclosure; and
    [cir] Revise the $100,000 threshold for disclosure of environmental 
proceedings to which the government is a party to $300,000 to adjust 
for inflation.
     Revise Item 105 to:
    [cir] Require summary risk factor disclosure if the risk factor 
section exceeds 15 pages;
    [cir] Refine the principles-based approach of Item 105 by changing 
the disclosure standard from the ``most significant'' factors to the 
``material'' factors; and
    [cir] Require risk factors to be organized under relevant headings, 
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.\24\
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    \24\ The proposed amendments to Items 101 and 103 will affect 
only domestic registrants and ``foreign private issuers'' that have 
elected to file on domestic forms. This is because 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. Instead of Items 101 and 
103, the foreign private issuer forms refer to Part I of Form 20-F. 
See, e.g., Item 4.a. of Form F-1. In contrast, the proposed 
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. 17 
CFR 230.405. See also 17 CFR 240.3b-4(c).

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[[Page 44361]]

    We welcome feedback and encourage interested parties to submit 
comments on any or all aspects of the proposed amendments. When 
commenting, it would be most helpful if you include the reasoning 
behind your position or recommendation.

II. Description of the Proposed Amendments

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

    Item 101(a) of Regulation S-K 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.\25\ In describing the general development of the business, 
Item 101(a)(1) requires disclosure of the following:
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    \25\ 17 CFR 229.101(a). Item 101(a) states that information 
shall be disclosed for earlier periods if material to an 
understanding of the general development of the business.
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     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.\26\
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    \26\ 17 CFR 229.101(a).
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    The Concept Release solicited input on whether the disclosure 
provided under this Item continues to be useful and how this Item might 
be improved.\27\ A number of commenters recommended eliminating or 
streamlining the requirements in Item 101(a).\28\ Several of these 
commenters recommended limiting Item 101(a) disclosure to material 
developments,\29\ and a few commenters supported executive summaries 
and layering techniques for the business section.\30\
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    \27\ See Concept Release, supra note 6, at 23932.
    \28\ See letters from Allstate, Chamber, FedEx, CGCIV, EEI and 
AGA, Fenwick, NAREIT, NIRI, NYSSCPA, PNC, SIFMA, Davis, General 
Motors, and Financial Executives International.
    \29\ See letters from NAREIT, PNC, SIFMA, and Fenwick.
    \30\ See letters from Deloitte and CAQ.
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    In light of the feedback received, we are proposing amendments to 
Item 101(a)(1) that would provide more flexibility to tailor 
disclosures to the unique circumstances of each registrant, which in 
turn could result in improved disclosures for investors. In addition, 
for filings other than initial registration statements, we are 
proposing to require only material updates to this disclosure.
1. Eliminate Prescribed Timeframe
    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.\31\ 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,\32\ 
and 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.\33\
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    \31\ 17 CFR 229.101(a).
    \32\ 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 3 at 32, n. 88.
    \33\ 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)].
---------------------------------------------------------------------------

    The Concept Release solicited comments on whether the current five-
year timeframe for this disclosure is appropriate, or whether a shorter 
or longer timeframe should be considered.\34\ Several commenters 
recommended reducing the five-year timeframe for disclosure to a two- 
or three-year timeframe, or permitting well-established companies to 
provide the information through other means (such as a filer 
information page on the company's website) with updates only required 
every three years or more frequently if there has been a substantial 
change.\35\ One of these commenters suggested linking the timeframe to 
the two years presented in the financial statements to allow users to 
focus on material events in the current period.\36\ Some of these 
commenters noted that this information does not change significantly 
from year to year and indicated that repeating these disclosures each 
year, especially for well-established companies, provides limited value 
to investors and may potentially obscure or distract from more 
important information included in the document.\37\
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    \34\ See Concept Release, supra note 6.
    \35\ See letters from Allstate, NYSSCPA, and EEI and AGA.
    \36\ See letter from Allstate.
    \37\ See letters from EEI and AGA.
---------------------------------------------------------------------------

    We do not think it is necessary to prescribe a timeframe for which 
registrants should provide disclosure regarding the general development 
of their business. The currently required five-year timeframe may not 
elicit the most relevant disclosure for every registrant. 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 decision, while others may conclude that the 
material aspects of their business development can be described over a 
shorter timeframe. We are proposing to revise Item 101(a) to eliminate 
the five-year disclosure timeframe and require registrants to focus on 
the information material to an understanding of the development of 
their business, irrespective of a specific timeframe. For similar 
reasons, we are also proposing to revise Item 101(h) to eliminate the 
provision that currently requires smaller reporting companies to 
describe the development of their business during the last three 
years.\38\ We believe that these proposed revisions would result in 
disclosure of information that is material to investors' understanding 
of the development of a registrant's business while reducing outdated 
and irrelevant disclosure.
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    \38\ We are proposing only to eliminate the required timeframe 
in Item 101(h). We are, however, proposing to retain 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.
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2. Require Only Updated Disclosure in Subsequent Filings
    Currently registrants are required to provide disclosure regarding 
the general development of the business in

[[Page 44362]]

registration statements and annual reports.\39\ The Concept Release 
sought comment on whether to allow registrants to omit this disclosure 
from filings other than the initial Securities or Exchange Act 
registration statement filed by the registrant and instead disclose 
only material changes in subsequent reports.\40\
---------------------------------------------------------------------------

    \39\ See 17 CFR 229.101(a).
    \40\ See Concept Release, supra note 6.
---------------------------------------------------------------------------

    Several commenters recommended revising the requirement to 
distinguish between new and established registrants, stating that much 
of the disclosure required under this Item is redundant for registrants 
already subject to the reporting requirements.\41\ Many of these 
commenters supported limiting the full disclosure required by Item 
101(a) to the initial filing and only requiring disclosure of material 
changes in subsequent filings,\42\ with a few of these commenters 
supporting the use of cross-references or hyperlinks to either the 
prior full disclosure or the relevant Form 8-K \43\ reports of material 
developments.\44\ A few commenters opposed limiting the full disclosure 
required by Items 101(a) and 101(c) to initial filings with follow-up 
disclosure of material changes in subsequent filings based on the 
belief that such a revision would require investors to search through 
multiple filings in a time-consuming attempt to understand the current 
state of a registrant's business development and operations.\45\
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    \41\ See letters from Chamber, FedEx, CGCIV, EEI and AGA, PNC, 
and SIFMA.
    \42\ See letters from SIFMA, PNC, Allstate, and Fenwick.
    \43\ 17 CFR 249.308.
    \44\ See letters from SIFMA and PNC.
    \45\ See letter from Maryland Bar Securities Committee; see also 
letter from RGA (stating that it is not always possible to fully 
understand a registrant's business if its business development must 
be ascertained from a variety of sources).
---------------------------------------------------------------------------

    We propose to retain the requirement for registrants to describe 
the general development of the business in initial registration 
statements under the Securities Act and Exchange Act.\46\ For filings 
subsequent to a registrant's initial registration statement, we propose 
revising Item 101(a)(1) to require an update of this disclosure, with a 
focus on material developments, if any, in the reporting period, 
including if the business strategy has changed.\47\ We also propose to 
require that, pursuant to Sec.  230.411 or Sec.  240.12b-23, a 
registrant incorporate by reference, and include an active hyperlink 
\48\ to, the most recently filed disclosure that, together with the 
update, would present a full discussion of the general development of 
its business.\49\ Under this approach, a reader would have access to a 
full discussion by reviewing the updated disclosure and one hyperlinked 
disclosure.\50\ As noted by one commenter, registrants often repeat 
information from year-to-year in annual reports on Form 10-K,\51\ with 
this disclosure changing very little from filing to filing.\52\ This 
commenter also observed that there is no need for registrants to 
include this disclosure in both registration statements and annual 
reports as investors can easily access information about the general 
development of business through company websites or the Commission's 
EDGAR system, which was not the case when Regulation S-K was first 
adopted.\53\ Because repetitive information may obscure more important 
information, we believe the proposed amendments would help focus 
investor attention on material developments in the reporting period. By 
also requiring that a registrant use one hyperlink to connect the 
updated disclosure with the previous disclosure, which together would 
result in a full discussion of its general business development, the 
amendment as proposed would help limit any burdensome effect on 
investors caused by this discussion being located in more than one 
document.\54\
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    \46\ Although, as discussed below, we propose to amend Item 
101(a)(1), we are retaining Item 101(a)(2) and redesignating it as 
Item 101(a)(3).
    \47\ Registrants are currently permitted to provide Item 101(a) 
disclosure by incorporating by reference some or all of the required 
disclosure from a previous filing pursuant to Securities Act Rule 
411 (17 CFR 230.411) or Exchange Act Rule 12b-23 (17 CFR 240.12b-
23). Therefore, our proposal to require only an update of the Item 
101(a)(1) disclosure in a filing made subsequent to a registrant's 
initial registration statement is a clarification of our existing 
rules rather than a substantive change.
    \48\ The SEC Investor Advisory Committee has recommended the use 
of hyperlinks to reduce redundant disclosure in SEC filings. See 
letter from IAC.
    \49\ The Commission recently revised Rules 411 and 12b-23 to 
require the inclusion of an active hyperlink to information 
incorporated into a registration statement or report by reference if 
such information is publicly available on the Commission's 
Electronic Data Gathering, Analysis, and Retrieval system 
(``EDGAR''). See FAST Act Adopting Release, supra note 1 at 12694-
12695.
    \50\ Alternatively, a registrant may elect to provide a complete 
discussion of its business development, including material updates, 
in which case no hyperlink would be required.
    \51\ 17 CFR 249.310.
    \52\ See letter from PNC.
    \53\ See id.
    \54\ For similar reasons, we are proposing 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 proposed Item 101(a)(2), including the proposed hyperlink 
requirement. See the proposed amendment of Item 101(h).
---------------------------------------------------------------------------

3. Include Material Changes to Business Strategy as Potential 
Disclosure Topic
    We are proposing to amend Item 101(a)(1) to be more principles-
based by providing a non-exclusive list of the types of information 
that a registrant may need to disclose, and by requiring disclosure of 
a topic only to the extent such information is material to an 
understanding of the general development of a registrant's 
business.\55\ We believe that such an approach would elicit material 
disclosure for investors while also providing the flexibility to tailor 
the disclosure to reflect the circumstances of each registrant.
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    \55\ Proposed Item 101(a) refers to materiality in the 
introductory language of paragraph (a)(1). While materiality is 
repeated in three of the four listed topics that follow, this is not 
intended to create a second or different analysis regarding 
materiality for any such topic.
---------------------------------------------------------------------------

    Three of the four matters that we are proposing to list as 
disclosure topics are currently covered in Item 101(a)(1):
     Material bankruptcy, receivership, or any similar 
proceeding;
     The nature and effects of any 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.
    We are also proposing to include as a listed disclosure topic, to 
the extent material to an understanding of the registrant's business, 
transactions and events that affect or may affect the company's 
operations, including material changes to a registrant's previously 
disclosed business strategy. Item 101(a) does not currently require 
disclosure of material changes to a registrant's previously disclosed 
business strategy. The Concept Release solicited input on whether Item 
101(a) should be revised to require the disclosure of a registrant's 
business strategy; whether investors would find such disclosure 
important or useful and, if so, whether this requirement should be 
included in Management's Discussion and Analysis (``MD&A''); \56\ and 
whether ``business strategy'' should be defined.\57\ Commenters were 
divided on whether disclosure of a registrant's business strategy 
should be a requirement.\58\ Most of the commenters

[[Page 44363]]

that opposed a mandatory business strategy disclosure requirement did 
so on the grounds that because a registrant's business strategy could 
be proprietary, its disclosure could cause competitive harm.\59\
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    \56\ Item 303(a) [17 CFR 229.303(a)].
    \57\ See Concept Release, supra note 6.
    \58\ Several commenters supported requiring disclosure of a 
registrant's business strategy. See, e.g., letters from IIRC, NEI 
Investments (July 21, 2016), NYSSCPA, PRI, S. Percoco, AFL-CIO and 
International Corporate Accountability Roundtable (July 19, 2016). 
Other commenters opposed requiring disclosure of a registrant's 
business strategy. See letters from Allstate, Fenwick, Maryland Bar 
Securities Committee and CFA Institute, although CFA Institute 
supported voluntary disclosure of a registrant's business strategy.
    \59\ See letters from Allstate, Fenwick, and Maryland Bar 
Securities Committee.
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    Many registrants currently include disclosure regarding their 
business strategy in their initial registration statements. We believe 
that information regarding material changes to a previously disclosed 
business strategy may be material information for investors. We are 
therefore proposing to include material changes to a registrant's 
previously disclosed business strategy as a listed disclosure topic 
under Item 101(a). However, if a registrant has not previously 
disclosed its business strategy, we are not proposing to make the 
disclosure of that strategy mandatory in a Commission filing because of 
the concerns raised by commenters that such a requirement could force 
registrants to disclose proprietary information that could be harmful 
to their competitive position.\60\
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    \60\ See, e.g., letter from Fenwick.
---------------------------------------------------------------------------

    To the extent that other matters beyond those listed in the amended 
item are material to an understanding of the general development of a 
registrant's business, the registrant would be required to disclose 
those matters as well.
Request for Comment
    1. Is a prescribed timeframe for disclosure regarding the general 
development of a registrant's business necessary or desirable? If we 
should retain a prescribed timeframe, is the current five-year 
timeframe appropriate, or should it be longer or shorter?
    2. Alternatively, should we require a more detailed discussion of a 
registrant's general development of business on a periodic basis, such 
as every three years, and summary disclosure in other years? If so, 
would three years be an appropriate period, or should it be shorter or 
longer?
    3. For filings other than initial registration statements, should 
we no longer require a full discussion of the general development of 
the registrant's business, and require instead an update to the general 
development of the business disclosure with a focus on material 
developments in the reporting period, as proposed?
    4. When only updated business disclosure is provided in a filing, 
should we require the incorporation by reference of, and active 
hyperlink to, the most recently filed disclosure that, together with 
the update, would present a full discussion of the general development 
of a registrant's business, as proposed? Would such an approach, which 
would enable a reader to review the updated disclosure and one 
hyperlinked disclosure, facilitate an investor's understanding of the 
general development of a registrant's business?
    5. Would registrants find it difficult to apply the proposed 
principles-based requirements? How could we alleviate any expected 
difficulties?
    6. Would principles-based requirements for Item 101(a) effectively 
facilitate the provision of information that is material to an 
investment decision? If not, how might Item 101(a) be further improved?
    7. Should we provide a list of topics that may be material to an 
understanding of a registrant's business development, as proposed? Are 
the proposed topics (transactions and events that affect or may affect 
the company's operations, including material changes to a previously 
disclosed business strategy; bankruptcy, receivership, or any similar 
proceeding; the nature and effects of any other material 
reclassification, merger or consolidation of the registrant or any of 
its significant subsidiaries; and the acquisition or disposition of a 
material amount of assets other than in the ordinary course of 
business) appropriate? Should we exclude any of our proposed topics? 
Are there other topics that should be added (e.g., material changes in 
the mode of conducting the business)? Should we require disclosure of 
any or all of the proposed topics in all circumstances?
    8. Should we make disclosure of business strategy mandatory in 
Commission filings? If so, how should ``business strategy'' be defined 
and what can we do to address concerns about confidentiality?
    9. Should we revise Item 101(h) to eliminate the provision that 
currently requires smaller reporting companies to describe the 
development of their business during the last three years, as proposed? 
Is a prescribed timeframe for such disclosure necessary or desirable? 
If we should retain a prescribed timeframe, is the current three-year 
timeframe appropriate, or should it be longer or shorter?
    10. We are proposing to retain the current requirement in Item 
101(h) that if a smaller reporting company has not been in business for 
three years, it must provide the same information for predecessor(s) of 
the smaller reporting company if there are any. Should we eliminate or 
adjust this predecessor disclosure requirement for smaller reporting 
companies? A registrant that is not a smaller reporting company must 
also provide information about its predecessors in certain 
circumstances under current Item 101(a)(2). Should we eliminate the 
predecessor disclosure obligations for those registrants?
    11. Should we permit certain registrants to provide the general 
business development disclosure by other means (e.g., by a filer 
information page on the company's website)? If so, which registrants? 
Should we limit the use of such alternative means to well-known 
seasoned issuers? Are there concerns raised by the posting of the 
disclosure on a company's website (e.g., regarding how long the company 
must retain the business development disclosure, when it must update 
the disclosure, and liability issues)? If so, how should those concerns 
be resolved?

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: \61\
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    \61\ 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; where 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;

[[Page 44364]]

    (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 employees.\62\
---------------------------------------------------------------------------

    \62\ The Commission recently 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).
---------------------------------------------------------------------------

    The earliest forms of registration statements and annual reports 
required a brief outline of the general character of the business done 
and intended to be done by a registrant.\63\ Many of the enumerated 
disclosure requirements in Item 101(c) were adopted in 1973.\64\ The 
1973 adopting release noted that, in making investment decisions, 
venture capitalists and underwriters typically obtained specific 
information from companies about their competitive position and methods 
of competition in their respective industries and, accordingly, the new 
requirements were expected to provide similar information to the 
investing public.\65\ At the same time, the Commission also added 
requirements for the disclosure of the amount of backlog orders, the 
sources and availability of raw materials essential to the business, 
the number of employees and working capital practices.\66\
---------------------------------------------------------------------------

    \63\ See, e.g., Item 5 of Form A-2 adopted in 1935, which 
required registrants to outline briefly ``the general character of 
the business done and intended to be done by the registrant and its 
subsidiaries.'' See Release No. 33-276 (Jan. 14, 1935) [not 
published in the Federal Register]. Additionally, Items 3 through 5 
of Form A-1, adopted in 1933, required registrants to briefly 
describe ``the character of business done or intended to be done,'' 
disclose a list of states where the issuer owned property and was 
qualified to do business, and 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].
    \64\ See New Ventures, Meaningful Disclosure, Release No. 33-
5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)].
    \65\ See id.
    \66\ See id.
---------------------------------------------------------------------------

    In the S-K Study, the staff recommended reviewing the description 
of business for continuing relevance in light of changes that have 
occurred in the way businesses operate, which may make other 
disclosures relevant that are not expressly addressed under the current 
requirements.\67\ The Concept Release sought comment on whether Item 
101(c) continues to provide useful information to investors and how the 
Item's requirements may be improved.\68\ In particular, the Concept 
Release sought comment on the impact of listing the then thirteen 
requirements and whether the prescriptive items result in disclosure of 
information that is not important to some registrants.\69\
---------------------------------------------------------------------------

    \67\ See S-K Study, supra note 3, at 99-100.
    \68\ See Concept Release, supra note 6.
    \69\ See id.
---------------------------------------------------------------------------

    A number of commenters recommended revising Item 101(c) to make it 
more principles-based.\70\ A few commenters recommended emphasizing 
that the sub-items enumerated in Item 101(c) are examples only,\71\ 
while another commenter recommended revising the Item to specify that 
registrants should consider whether information that does not fall into 
the enumerated examples should nonetheless be disclosed.\72\ Some 
commenters recommended retaining the Item as it currently stands.\73\
---------------------------------------------------------------------------

    \70\ See letters from Chamber, FedEx, CGCIV, BDO, United Health, 
CAQ, SIFMA, E&Y, Grant, PWC, Allstate, Davis, Fenwick, General 
Motors, Financial Executives International, and CFA Institute.
    \71\ See letters from SIFMA and Allstate.
    \72\ See letter from SIFMA.
    \73\ See letters from RGA, CalSTRS and S. Percoco.
---------------------------------------------------------------------------

    Because the 12 items may not be relevant to all registrants, they 
can elicit disclosure that is not material to a particular registrant. 
For the most part, Item 101(c) currently provides that a registrant 
must disclose the enumerated items to the extent material to an 
understanding of the registrant's business taken as a whole. Based on 
the comments received that were critical of this provision,\74\ it 
appears, however, that many registrants may interpret Item 101(c) as 
requiring disclosure of each enumerated item, even if it is not 
material. We believe that shifting to an updated and more principles-
based disclosure framework for Item 101(c) would encourage registrants 
to exercise judgment in evaluating what disclosure to provide, which 
would result in disclosure more appropriately tailored to a 
registrant's specific facts and circumstances.
---------------------------------------------------------------------------

    \74\ See supra note 70.
---------------------------------------------------------------------------

    The Concept Release further sought comment on whether any of the 
current requirements in Item 101(c) should be presented in a different 
context, such as MD&A or risk factors.\75\ A number of commenters 
provided recommendations on the requirement to disclose working capital 
practices.\76\ Several of these commenters stated that working capital 
practices might be better addressed in MD&A,\77\ while one commenter 
suggested eliminating this disclosure from Item 101(c) because it is 
typically addressed in MD&A.\78\ In addition to being explicitly 
identified as a disclosure item in Item 101(c) for all registrants, 
Instruction 5 to Item 303(a) states that a discussion of working 
capital may be appropriate in MD&A for certain registrants.\79\ In an 
effort to consolidate working capital disclosure in one location and to 
avoid duplicative disclosure, we do not propose to include working 
capital practices as a possible topic in Item 101(c) with the 
expectation that working capital would be discussed in a registrant's 
MD&A, to the extent material.
---------------------------------------------------------------------------

    \75\ See Concept Release, supra note 6.
    \76\ See letters from Chamber, FedEx, CGCIV, and Fenwick.
    \77\ See letters from Chamber, FedEx, and CGCIV.
    \78\ See letter from Fenwick.
    \79\ Instruction 5 to Item 303(a) (``For example, a discussion 
of working capital may be appropriate for certain manufacturing, 
industrial or related operations but might be inappropriate for a 
bank or public utility.'').
---------------------------------------------------------------------------

    To facilitate application of our principles-based revisions to Item 
101, we propose to include in Item 101(c) the non-exclusive list of 
disclosure topics discussed below.\80\ We believe that the proposed 
topics would likely be material to many registrants and, thus, would 
facilitate the disclosure of information material to an investment 
decision while providing flexibility to tailor disclosure to the 
specific circumstances of each registrant. The proposed topics would 
not be line-item requirements, but to the extent that a topic is 
material to an understanding of a registrant's business, disclosure 
would be required.\81\
---------------------------------------------------------------------------

    \80\ We are not proposing to amend the more prescriptive 
alternative disclosure standards regarding business development, 
description of business, and other information specified under 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.
    \81\ Similar to Item 101(a), proposed Item 101(c) refers to 
materiality in the introductory language of paragraphs (c)(1) and 
(2). While materiality is repeated in some of the listed topics that 
follow, this is not intended to create a second or different 
analysis regarding materiality for any such topic.
---------------------------------------------------------------------------

    Under our proposal, the revised rule would not explicitly reference 
some of the disclosure requirements currently contained in Item 101(c). 
In addition to working capital practices, the proposed amendments would 
no longer list the following topics: Disclosure about new segments and 
dollar amount of backlog orders believed to be firm. Nevertheless, 
under the proposed principles-based approach, registrants still would 
have to provide disclosure about these topics, as well as any other 
topics regarding the registrants' business, if they are material to an 
understanding of their business.
    The proposal retains Item 101(c)'s distinction between disclosure 
topics

[[Page 44365]]

for which segment disclosure should be the primary focus, and those for 
which the focus should be on the registrant's business taken as a 
whole. The proposal clarifies, however, that, for any listed topic, 
disclosure is required only to the extent that it is material to an 
understanding of the registrant's business taken as a whole.
    Similar to current Item 101(c), most of the listed disclosure 
topics would fall into the category for which segment disclosure would 
be required to the extent the topic is material to an understanding of 
the registrant's business taken as a whole.\82\ We believe that, for 
the topic regarding the material effects of compliance with government 
regulation, including environmental regulation, and the topic regarding 
human capital resources, the appropriate primary focus should be with 
respect to the registrant's business taken as a whole. Similar to the 
current rule, however, if the information elicited regarding these two 
topics is material to a particular segment, the registrant would 
additionally be required to identify that segment.\83\
---------------------------------------------------------------------------

    \82\ See proposed Item 101(c)(1).
    \83\ See proposed Item 101(c)(2).
---------------------------------------------------------------------------

1. Revenue-Generating Activities, Products and/or Services, and any 
Dependence on Key Products, Services, Product Families, or Customers, 
Including Governmental Customers
    While we recognize that the twelve enumerated items in Item 101(c) 
may not be relevant across all industries or businesses, 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, would 
generally be material to an investment decision. We agree with the 
commenter who stated 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.\84\ As such, we propose 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.\85\
---------------------------------------------------------------------------

    \84\ See letter from E&Y.
    \85\ See proposed Item 101(c)(1)(i). Form S-4 refers to the 
current version of Item 101(c)(1)(i), which pertained to a 
registrant's principal products or services, but also refers to 
Items 101(b) and (d), which pertain, respectively, to certain 
financial information about business segments and geographic areas. 
See paragraph (b)(3)(i) of Item 12 under Part I, Section B of Form 
S-4. The Commission recently eliminated Items 101(b) and (d) as 
business disclosure requirements because much of the disclosure was 
duplicative of disclosure in the registrant's financial statements. 
See DUSTR Adopting Release, supra note 62, at 50168-50169. Because 
proposed Item 101(c)(1)(i) would continue to pertain to a 
registrant's products or services, we are proposing to retain this 
Item 101 provision in Form S-4, but remove Items 101(b) and (d) from 
that Form to reflect their elimination from Regulation S-K. The same 
paragraph of Form S-4 also includes descriptions of disclosure items 
included under Items 101(b), (c)(1)(i), or (d). We are proposing to 
remove the descriptor that pertains to Item 101(d) (``foreign and 
domestic operations and export sales''), but retain the descriptor 
``industry segments'' since that descriptor would continue to apply 
to Item 101(c)(1)(i). We are proposing to substitute the descriptor 
``key products or services'' for ``classes of similar products or 
services'' because the proposed amendment to Item 101(c)(1)(i) would 
include the former but would eliminate the latter as a listed 
disclosure topic under Item 101(c)(1)(i).
---------------------------------------------------------------------------

2. Status of Development Efforts for New or Enhanced Products, Trends 
in Market Demand and Competitive Conditions
    We continue to believe that disclosure regarding development 
efforts for new or enhanced products, and trends in market demand and 
competition would generally be material to an investment decision. In 
response to the Concept Release, several commenters suggested 
additional disclosure related to competitive conditions. One commenter 
recommended requiring disclosure of the registrant's competitive 
landscape, noting that companies not only compete within their industry 
but also with entities external to their industry segment.\86\ Another 
commenter supported greater disclosure of a registrant's competitive 
position and especially the market share of its products, competitive 
landscape and industry trends shaping the nature of competition.\87\ 
Rather than prescribe additional disclosures for this topic that must 
be provided in all circumstances, we believe that a principles-based 
approach that allows flexibility for registrants to disclose this 
information to the extent it is material to an understanding of their 
business would better accommodate the variety of competitive conditions 
that registrants may face.\88\
---------------------------------------------------------------------------

    \86\ See letter from CFA Institute.
    \87\ See letter from S. Percoco.
    \88\ See proposed Item 101(c)(1)(ii).
---------------------------------------------------------------------------

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, 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.\89\
---------------------------------------------------------------------------

    \89\ 17 CFR 229.101(c)(1)(iii) and (iv).
---------------------------------------------------------------------------

    As discussed in greater detail below, we propose modernizing these 
disclosure requirements to refocus registrants' disclosure on all 
resources material to their business. We believe that this approach 
would elicit more informative disclosure tailored to the specific 
circumstances of each company or its industry. To facilitate 
application, we propose including (a) raw materials, and (b) patents, 
trademarks, licenses, franchises and concessions held, as examples of 
resources that may be material to a registrant's business.
a. Raw Materials
    Item 101(c)(1)(iii) currently requires disclosure of the sources 
and availability of raw materials.\90\ In response to the Concept 
Release's solicitation of feedback,\91\ we received several comment 
letters that specifically addressed the requirement to disclose the 
sources and availability of raw materials.\92\ Two commenters 
recommended retaining this requirement.\93\ One of these commenters 
specified that the disclosure requirement should be retained with a 
materiality overlay,\94\ while the other commenter stated that 
disclosure should only be required if raw materials are difficult to 
obtain.\95\ One commenter stated that, where material, registrants 
generally discuss the specific sub-items in Item 101(c), including 
sources and availability of raw materials, in the business narrative or 
elsewhere, including MD&A.\96\
---------------------------------------------------------------------------

    \90\ 17 CFR 229.101(c)(1)(iii).
    \91\ See Concept Release, supra note 6.
    \92\ See letters from Chamber, FedEx, CGCIV, Davis, Fenwick, and 
NYSSCPA.
    \93\ See letters from Fenwick and NYSSCPA.
    \94\ See letter from Fenwick.
    \95\ See letter from NYSSCPA.
    \96\ See letter from Davis.
---------------------------------------------------------------------------

    We propose retaining sources and availability of raw materials as a 
listed disclosure topic in Item 101(c) \97\ because, while not 
applicable to all registrants, raw materials are fundamental to 
businesses that depend on them. Although some registrants include 
disclosure regarding raw materials elsewhere in disclosure documents 
(such as in MD&A), this disclosure often has a different focus.\98\

[[Page 44366]]

Further, our proposal to shift Item 101(c) to a more principles-based 
approach would help clarify that disclosure regarding sources and 
availability of raw materials by registrants is required only when 
material to their business.
---------------------------------------------------------------------------

    \97\ See proposed Item 101(c)(1)(iii)(A).
    \98\ For example, a discussion of raw materials in a 
registrant's MD&A may focus more narrowly on the effect that 
spending on, or budgeting for, raw materials may have on a 
registrant's liquidity and capital resources, whereas Item 101(c)(1) 
attempts to elicit broader disclosure concerning activities 
involving raw materials, including identifying and procuring sources 
for those raw materials, that may be material to an understanding of 
the registrant's business as a whole.
---------------------------------------------------------------------------

b. The Duration and Effect of all Patents, Trademarks, Licenses, 
Franchises, and Concessions Held
    Item 101(c)(1)(iv) requires disclosure of the importance, 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.\99\ The Concept Release 
solicited input on whether to maintain, expand or revise the current 
scope of this Item and requested comment on the competitive costs of 
this disclosure.\100\ It also sought comment on whether to limit this 
disclosure requirement to certain industries.\101\
---------------------------------------------------------------------------

    \99\ 17 CFR 229.101(c)(1)(iv).
    \100\ See Concept Release, supra note 6.
    \101\ See id.
---------------------------------------------------------------------------

    Numerous commenters supported maintaining the current scope of Item 
101(c)(1)(iv),\102\ while several commenters opposed expanding this 
Item based on competitive concerns.\103\ Item 101(c)(1)(iv) currently 
does not refer to disclosure of copyrights or trade secrets and many 
commenters expressed concern that requiring such disclosure would 
impose substantial costs and be unduly burdensome by requiring 
registrants to systematically identify and catalog such intellectual 
property.\104\ Further, several commenters suggested that because trade 
secret protection is contingent on the owner taking reasonable measures 
to keep the information secret, any revision to this Item to require 
disclosure of ``intellectual property'' would, by definition, include 
trade secrets and endanger these assets.\105\ In addition, some 
commenters opposed establishing different intellectual property 
requirements by industry \106\ and some commenters supported 
maintaining the current materiality threshold for disclosure.\107\
---------------------------------------------------------------------------

    \102\ See letters from 36 Organizations with an Interest in 
Trade Secret Protection (Aug. 8, 2016) (``36 Organizations''), 
Association of American Publishers (July 21, 2016), American 
Intellectual Property Law Association (Aug. 9, 2016) (``American IP 
Law Association''), Chamber, FedEx, Intellectual Property Owners 
Association (July 15, 2016) (``IP Owners Association''), S. Percoco, 
NAM, NYSSCPA, the Software Association, the Entertainment Software 
Association and the Software Information Industry Association (July 
21, 2016) (``Software Associations''), Financial Services Roundtable 
(July 21, 2016), General Motors, and Financial Executives 
International.
    \103\ See letters from 36 Organizations (focusing only on trade 
secrets), American IP Law Association; Chamber, FedEx, Financial 
Services Roundtable (focusing only on trade secrets), IP Owners 
Association, NAM, Association of American Publishers (focusing only 
on copyrights), General Motors, Financial Executives International, 
and Software Associations.
    \104\ See, e.g., letters from 36 Organizations, American IP Law 
Association, Chamber, FedEx, IP Owners Association, NAM, and 
Association of American Publishers.
    \105\ See letters from 36 Organizations, American IP Law 
Association, Chamber, FedEx, Financial Services Roundtable, IP 
Owners Association, and NAM.
    \106\ See letters from IP Owners Association, NYSSCPA, Software 
Associations, and American IP Law Association.
    \107\ See letters from American IP Law Association, IP Owners 
Association, NAM, ACC and NYSSCPA.
---------------------------------------------------------------------------

    Conversely, a number of commenters recommended generally expanding 
the scope of Item 101(c)(1)(iv).\108\ In this regard, some commenters 
stated that a more complete record of a public company's intellectual 
property is useful to the public, shareholders, researchers, and the 
financial markets generally.\109\ One of these commenters recommended 
expanding the requirement to include detailed intellectual property 
information for both material and immaterial intellectual property with 
the caveat that immaterial intellectual property should be required 
only if the information is readily available to report and within the 
knowledge of the company.\110\ Another commenter, in recommending 
expansion of this requirement, noted that intellectual property assets 
are a major driver of value in corporations, and asserted that more 
open disclosure would allow shareholders to better assess the value of 
corporate intellectual property assets and monitor directors' 
stewardship of these assets.\111\
---------------------------------------------------------------------------

    \108\ See letters from Black Stone IP, LLC (May 19, 2016), IIRC, 
Colleen V. Chien et al. (July 22, 2016) (``IP Professors''), Prof. 
Denoncourt (July 31, 2016), and CFA Institute.
    \109\ See letters from IP Professors and Prof. Denoncourt.
    \110\ See letter from IP Professors.
    \111\ See letter from Prof. Denoncourt.
---------------------------------------------------------------------------

    Another commenter recommended including copyrights under this item 
and requiring detailed tabular disclosure by asset type.\112\ This 
commenter also opposed establishing different disclosure requirements 
by industry.\113\
---------------------------------------------------------------------------

    \112\ See letter from CFA Institute.
    \113\ See id.
---------------------------------------------------------------------------

    A broad range of industries directly and indirectly benefit from 
intellectual property \114\ and intellectual property has become 
increasingly important to business performance.\115\ Certain industries 
produce or use significant amounts of intellectual property or rely 
more heavily on these rights.\116\ Accordingly, some registrants 
provide detailed disclosure in response to Item 101(c)(1)(iv), although 
disclosure varies among registrants and across industries.
---------------------------------------------------------------------------

    \114\ See Economics and Statistics Administration and United 
States Patent and Trademark Office, Intellectual Property and the 
U.S. Economy: Industries in Focus (Mar. 2012) at iv, available at 
https://www.uspto.gov/sites/default/files/news/publications/IP_Report_March_2012.pdf (``Intellectual Property Report'').
    \115\ See, e.g., Kelvin W. Willoughby, What impact does 
intellectual property have on the business performance of technology 
firms?, Int. J. Intellectual Property Management, Vol. 6, No. 4 
(2013).
    \116\ See Intellectual Property Report, supra note 114. This 
report identifies seventy-five industries as ``IP-intensive.'' In 
this report, patents, trademarks and copyrights were the categories 
of intellectual property assessed. The methodology for designating 
each of these subcategories as ``IP-intensive'' is outlined further 
in this report. For patent intensive industries, the report utilized 
the North American Industry Classification System (NAICS) codes and 
identified, as the four most patent-intensive industries, those 
industries classified in computer and electronic product 
manufacturing (NAICS 334). This three-digit NAICS industry includes 
computer and peripheral equipment; communications equipment; other 
computer and electronic products; semiconductor and other electronic 
components; and navigational, measuring, electro-medical, and 
control instruments.
---------------------------------------------------------------------------

    In the biotechnology and pharmaceutical industries, registrants 
that provide detailed patent disclosure often disclose the jurisdiction 
in which the patent was filed, year of expiration, type of patent 
(e.g., composition of matter, method of use, method of delivery or 
method of manufacturing), products or technologies to which the patent 
relates and how the patent was acquired (e.g., licensed from another 
entity or owned and filed by the registrant). Some registrants in these 
industries aggregate patent disclosure by groups of patents, 
potentially making disclosure about individual material patents 
difficult to discern. As registrants in the biotechnology and 
pharmaceutical industries regularly sell one or more patented products 
that generate substantial revenue, disclosure of ``patent cliffs,'' 
\117\ which may result

[[Page 44367]]

in material adverse financial effects, may be required in the risk 
factors section or MD&A.\118\
---------------------------------------------------------------------------

    \117\ The term ``patent cliff'' as used in the biotechnology and 
pharmaceutical industry refers to a future loss of patent protection 
and consequential loss of revenue. These potential future losses are 
known to registrants far in advance of their onset. When they occur, 
they often precipitate material adverse financial effects. See, 
e.g., Andrew Jack, Pharma tries to avoid falling off `patent cliff,' 
Financial Times, May 6, 2012 and Cliffhanger, Economist, Dec. 3, 
2011. See also Ed Silverman, Big Pharma Faces Some Big Patent 
Losses, but Pipelines are Improving, Wall St. J.: L. Blog, available 
at https://blogs.wsj.com/pharmalot/2015/02/09/big-pharma-faces-some-big-patent-losses-but-pipelines-are-improving/.
    \118\ See generally ``Interpretation: Commission Guidance 
Regarding Management's Discussion and Analysis of Financial 
Condition and Results of Operations,'' Release No. 33-8350 (Dec. 19, 
2003) [68 FR 75056 (Dec. 29, 2003)], available at https://www.sec.gov/rules/interp/33-8350.htm.
---------------------------------------------------------------------------

    In the information technologies and services industry, registrants 
protect their intellectual property through the use of patents, 
trademarks, copyrights, trade secrets, licenses, and confidentiality 
agreements.\119\ Registrants with large portfolios of intellectual 
property often disclose that their products, services, and technologies 
are not dependent on any specific patent, trademark, copyright, trade 
secret, or license. As a result, these registrants often provide only 
high-level discussions of their intellectual property portfolios, which 
include general statements of a registrant's development, use, and 
protection of its intellectual property. Registrants with smaller 
intellectual property portfolios tend to provide slightly more detailed 
discussions, including, for example, disclosure of the total number of 
issued patents, a range of years during which those patents expire and 
the total number of pending patent applications.
---------------------------------------------------------------------------

    \119\ See Bruce Abramson, Promoting Innovation in the Software 
Industry: A First Principles Approach to Intellectual Property 
Reform, 8 B.U. J. Sci. & Tech. L. 75 (2002) (discussing the software 
industry's use of intellectual property law).
---------------------------------------------------------------------------

    In general, registrants in the information technologies and 
services industry use copyrights to protect against the unauthorized 
copying of software programs \120\ and trade secrets to protect 
proprietary and confidential information that derives its value from 
continued secrecy.\121\ Since Item 101(c)(1)(iv) does not require 
disclosure about copyrights or trade secrets, registrants currently 
make disclosure about such matters voluntarily.
---------------------------------------------------------------------------

    \120\ See Dennis S. Karjala, Copyright Protection of Operating 
Software, Copyright Misuse, and Antitrust, 9 Cornell J.L. & Pub. 
Pol'y 161, 172 (1999) (discussing the dependence of software 
technology companies on copyright).
    \121\ See Raymond T. Nimmer & Patricia Ann Krauthaus, Software 
Copyright: Sliding Scales and Abstracted Expression, 32 Hous. L. 
Rev. 317, 325 (1995) (distinguishing among the software industry's 
use of trade secret law, patent law and copyright law).
---------------------------------------------------------------------------

    We propose to retain as a listed disclosure topic the importance, 
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.\122\ In response to concerns 
expressed by commenters on the Concept Release, however, we are not 
proposing to expand this topic to include copyrights and trade secrets. 
In addition to competitive concerns, commenters noted 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.\123\
---------------------------------------------------------------------------

    \122\ See proposed Item 101(c)(1)(iii)(B).
    \123\ 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). But see also letters from 
International Integrated Reporting Council (July 20, 2016) and CFA 
Institute (Oct. 6, 2016) (supporting the inclusion of copyrights 
under Item 101(c)).
---------------------------------------------------------------------------

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
    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.\124\
---------------------------------------------------------------------------

    \124\ 17 CFR 229.101(c)(1)(ix).
---------------------------------------------------------------------------

    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.\125\ At any given time in the performance of a 
government contract, an estimate of its profitability is often 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.\126\
---------------------------------------------------------------------------

    \125\ 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)].
    \126\ 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 are proposing to retain 
renegotiation or termination of government contracts as a listed 
disclosure topic \127\ because we continue to believe that, when 
material to a business, disclosure of this information is important for 
investors.
---------------------------------------------------------------------------

    \127\ See proposed Item 101(c)(1)(iv).
---------------------------------------------------------------------------

5. The Extent to Which the Business Is or May Be Seasonal
    Item 101(c)(1)(v) requires disclosure of the extent to which the 
business of the segment is or may be seasonal to the extent material to 
an understanding of the registrant's business taken as a whole.\128\ 
The Commission recently considered whether to delete Item 
101(c)(1)(v).\129\ While the Commission initially proposed deleting 
this Item,\130\ noting that both Regulation S-K \131\ and U.S. GAAP 
\132\ require disclosures about seasonality in interim periods,\133\ 
the Commission ultimately decided 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,\134\ and retain Item 
101(c)(1)(v). The Commission based its decision to retain this Item on 
a concern about the potential loss of information in the fourth quarter 
about the extent to which the business of a registrant or its 
segment(s) is or may be seasonal

[[Page 44368]]

because U.S. GAAP may not elicit this disclosure.\135\
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    \128\ 17 CFR 229.101(c)(1)(v).
    \129\ 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. We refer to these letters throughout as ``DUSTR'' 
letters.
    \130\ See DUSTR Proposing Release, supra note 129.
    \131\ Instruction 5 to Item 303(b) of Regulation S-K [17 CFR 
229.303(b)] required a discussion of any seasonal aspects of a 
registrant's business where the effect is material.
    \132\ ASC 270-10-45-11.
    \133\ See DUSTR Proposing Release, supra note 129.
    \134\ The Commission decided to delete Instruction 5 to Item 
303(b) because of its belief that 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 
62, at 50169.
    \135\ 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.
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    In light of the Commission's recent evaluation of this disclosure 
item, we propose including as a disclosure topic in Item 101(c) the 
extent to which the business is or may be seasonal.\136\
---------------------------------------------------------------------------

    \136\ See proposed Item 101(c)(1)(v).
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6. Compliance With Material Government Regulations, Including 
Environmental Regulations
    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.\137\
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    \137\ 17 CFR 229.101(c)(1)(xii).
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    The Concept Release solicited input on whether to increase or 
reduce the disclosure required by this Item and whether this disclosure 
is important to investors.\138\ It also sought comment on whether to 
require this disclosure in a different format.\139\ Some commenters 
supported retaining Item 101(c)(1)(xii).\140\ A few of these commenters 
stated that this disclosure would increase in importance given trends 
toward an enhanced regulatory approach to environmental 
protection.\141\ Several commenters supported retaining the Item but 
opposed expanding it to include additional requirements.\142\ Other 
commenters supported expanding this Item.\143\ A few of these 
commenters supported requiring more detailed disclosure of 
environmental fines, violations, and litigation (e.g., whether these 
are rare or recurring).\144\ One commenter recommended including this 
requirement in a broader category of government regulations.\145\
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    \138\ See Concept Release, supra note 6.
    \139\ See id.
    \140\ See letters from PRI, the Carbon Tracker Initiative (July 
20, 2016), S. Percoco, Chamber, FedEx, CGCIV, NIRI, and CFA 
Institute.
    \141\ See, e.g., letters from PRI and the Carbon Tracker 
Initiative.
    \142\ See letters from Chamber, FedEx, CGCIV, and NIRI.
    \143\ See letters from CalPERS, DHC Consulting, Impax Asset 
Management Limited (July 19, 2016) (``Impax''), Good Jobs First, 
Domini Social, and GRI.
    \144\ See letters from Impax, Domini Social and Good Jobs First.
    \145\ See letter from Fenwick.
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    Pursuant to the National Environmental Policy Act of 1969 
(``NEPA''),\146\ 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).\147\ Subsequent litigation \148\ 
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.\149\ 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.\150\
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    \146\ Public Law 91-190, 42 U.S.C. 4321-4347 (Jan. 1, 1970) 
(``NEPA'').
    \147\ 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'').
    \148\ See Natural Resources Defense Council, Inc. v. SEC, 389 F. 
Supp. 689 (D.D.C. 1974); and Natural Resources Defense Council, Inc. 
v. SEC, 606 F.2d 1031 (DC 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).
    \149\ See Disclosure of Environmental and Other Socially 
Significant Matters, Release No. 33-5569 (Feb. 11, 1975) [40 FR 7013 
(Feb. 18, 1975)].
    \150\ 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.
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    While 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). The 
Concept Release sought comment on whether to require registrants to 
disclose government regulations material to their business given that 
many registrants already voluntarily provide such information.\151\ In 
addition, it sought input on whether to require disclosure of foreign 
regulations applicable to the operation of the registrant's 
business.\152\ A few commenters supported a specific requirement to 
disclose government regulations \153\ while one commenter opposed such 
a requirement, stating that it would not provide significant additional 
information.\154\ Some commenters supported requiring disclosure of 
foreign regulatory risks.\155\ Two commenters specified that this 
requirement should be limited to foreign regulations material to the 
registrant's business.\156\ One commenter opposed a requirement to 
discuss foreign regulations that affect a registrant's business and, 
instead, recommended revising Item 103 to require disclosure of any 
foreign tax audits or actions with negative findings, stating this 
would be less costly and time consuming than a requirement to disclose 
foreign regulations.\157\
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    \151\ See Concept Release, supra note 6.
    \152\ See id.
    \153\ See letters from Fenwick and S. Percoco.
    \154\ See letter from NYSSCPA.
    \155\ See letters from IAC, NYSSCPA, and SIFMA.
    \156\ See letters from NYSSCPA and SIFMA.
    \157\ See letter from E. Bean.
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    Although not required by Item 101(c), many registrants currently 
discuss government regulations relevant to their business, often in the 
form of a list. Healthcare and insurance providers regularly disclose 
their collection, use and protection of individually-identifiable 
information and compliance with the Health Insurance Portability and 
Accountability Act of 1996,\158\ as well as the impact of the Patient 
Protection and Affordable Care Act \159\ on their business. 
Biotechnology or medical device companies often disclose the status of 
and process for FDA approval of significant new drugs or medical 
devices. Public utilities typically discuss regulation by various 
Federal, state, and local authorities and include information about 
state ratemaking procedures, which determine the rates utilities charge 
and the return on invested capital.
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    \158\ Public Law 104-191, 110 Stat. 1936 (1996).
    \159\ Public Law 111-148, 124 Stat. 119 (2010).
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    Registrants in the financial services industry regularly describe 
Federal and state regulation as well as supervision by the Federal 
Reserve Board, while registrants with a material amount of U.S. 
government contracts disclose the laws and regulations for government 
contracts. Registrants with tax strategies involving foreign 
jurisdictions typically disclose that they are subject to income taxes 
in both the U.S. and numerous foreign jurisdictions, and that future 
changes to U.S. and non-U.S. tax law could adversely affect their 
anticipated financial position and results. Some

[[Page 44369]]

registrants disclose the impact of tax treaties between the U.S. and 
one or more foreign jurisdictions on their business.
    Consistent with the current practice of many registrants, as 
observed by the staff in its review of filings, we propose including 
the material effects of compliance with material government 
regulations, not just environmental laws, as a listed disclosure topic 
in Item 101(c).\160\ This disclosure topic would focus on the material 
effects that compliance with material governmental regulations, both 
foreign and domestic, may have upon the capital expenditures, earnings 
and competitive position of the registrant and its subsidiaries. We 
believe that this more principles-based approach would help provide 
investors with the information material to an investment decision about 
a registrant's compliance with the government regulations that 
materially affect the registrant's business so that investors may 
achieve a more complete understanding of the registrant's business. 
This approach would also enable each registrant to tailor its 
disclosure regarding its compliance with those governmental regulations 
that are of particular importance to the registrant. Finally, the 
proposed approach would codify what has become common practice 
regarding government regulation disclosure.
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    \160\ See proposed Item 101(c)(2)(i). We note that, despite the 
repetition of materiality within this topic in relation to both 
effects of compliance and government regulations, we do not foresee 
any circumstances whereby a registrant could determine there are 
material effects from compliance with a government regulation, but 
that the government regulation itself is not material to the 
registrant's business taken as a whole.
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    While we propose to retain the requirement that a registrant 
disclose material estimated capital expenditures for environmental 
control facilities for the current fiscal year and any other subsequent 
period that the registrant deems material,\161\ we are not proposing to 
require the disclosure of additional specific expenditures related to 
environmental compliance, as some commenters have suggested.\162\ We 
believe that a more principles-based approach would permit a registrant 
to tailor its disclosure by focusing on the effects of environmental 
compliance that are material to its particular business. This proposed 
approach would also benefit investors by helping to reduce or eliminate 
boilerplate or other disclosure concerning the effects of environmental 
compliance that may not be material to an understanding of the business 
of a particular registrant.
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    \161\ Current Item 101(c)(i)(xii) requires the disclosure of 
material estimated capital expenditures for environmental control 
facilities for the remainder of a registrant's current fiscal year 
and its succeeding fiscal year as well as for such further periods 
as the registrant may deem material. In order to simplify the 
disclosure, and in keeping with our more principles-based approach, 
we are proposing to revise Item 101(c) to require such environmental 
control facilities expenditures disclosure for the registrant's 
current fiscal year and any other subsequent period deemed material 
by the registrant. See proposed Item 101(c)(2)(i).
    \162\ See, e.g., letters from DHC Consulting, Domini Social, and 
Impax. Our proposed approach is consistent with the views of several 
commenters that supported the retention of Item 101(c)'s 
environmental compliance disclosure provision while opposing its 
expansion. See supra note 142.
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7. Human Capital Disclosure
    Item 101(c)(1)(xiii) currently requires disclosure of the number of 
persons employed by the registrant.\163\ The Concept Release solicited 
input on this disclosure requirement; \164\ in particular, we requested 
feedback on:
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    \163\ 17 CFR 229.101(c)(1)(xiii).
    \164\ In addition, there has been congressional interest in the 
topic of modernizing human capital disclosures by registrants. See, 
e.g., letter from Sen. Mark R. Warner (July 19, 2018) (``Sen. 
Warner'').
---------------------------------------------------------------------------

     Whether this disclosure is important to investors;
     Whether to require or permit registrants to provide a 
range of its number of employees or independent contractors;
     Whether disclosure regarding anticipated material changes 
in the number of employees would be useful to investors; and
     Whether to require registrants to provide disclosure 
distinguishing among their total employees such as by full-time and 
part-time or seasonal employees; employees and independent contractors; 
or domestic or foreign employees.\165\
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    \165\ See Concept Release, supra note 6.
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    Many commenters recommended retaining and expanding the requirement 
to disclose the number of persons employed by the registrant,\166\ with 
some asserting that disclosure of the exact number of employees would 
help investors understand the risks of potential material labor and 
human rights violations and that, for contractors or subcontractors, 
disclosing a range of these workers would be acceptable if sufficiently 
narrow and accompanied by disclosure explaining why the exact number is 
unavailable.\167\ Conversely, a number of commenters questioned the 
utility of requiring registrants to disclose the number of persons 
employed by the registrant.\168\ Several of these commenters opposed 
expanding the requirement,\169\ while another commenter stated that 
this disclosure is typically immaterial and any change in the number of 
employees that materially affects the registrant's results of 
operations would be disclosed in MD&A.\170\
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    \166\ See letters from RGA, E. Bean (July 6, 2016), CII, 
Railpen, NYSC, Interfaith Center on Corporate Responsibility (July 
14, 2016) (``ICCR''), US SIF Foundation (July 14, 2016) (``US 
SIF''), Dana Investment Advisors (July 15, 2016) (``Dana 
Investment''), Douglas Hileman Consulting LLC (July 15, 2016) (``DHC 
Consulting''), Sisters of Charity of Saint Elizabeth (July 18, 2016) 
(``Sisters of Charity''), Christian Church Foundation (July 18, 
2016) (``CCF''), Park Foundation (July 19, 2016) (``Park''), OIP 
Trust (July 19, 2016) (``OIP''), Priests of the Sacred Heart (July 
20, 2016) (``Sacred Heart''), Sister Schools of St. Francis (July 
20, 2016) (``S.S. St. Francis''), Friends Fiduciary Corporation 
(July 20, 2016) (``Friends''), LGIM, Everence Financial and the 
Praxis Mutual Funds (July 20, 2016) (``Everence''), Sister Schools 
of Notre Dame (July 21, 2016) (``SSND''), Provincial of the School 
Sisters of St. Francis of St. Joseph Convent (July 20, 2016) 
(``SSSF-Wisconsin''), As You Sow (July 21, 2016), CAQ, GRI (July 21, 
2016), Domini Social, E&Y, CalSTRS, Hermes Investment Management 
(July 21, 2016), NYC Comptroller, Good Jobs First (July 21, 2016), 
Maryland Bar Securities Committee, Tri-State Coalition for 
Responsible Investment (July 21, 2016) (``TSCRI''), Addenda Capital 
(July 21, 2016), AFSCME, AFL-CIO, Bloomberg (July 21, 2016), Oxfam 
America (July 21, 2016), Presbyterian Church U.S.A. (July 21, 2016) 
(``PC USA''), Allstate, Cornerstone, Christian Brothers Investment 
Services (July 21, 2016) (``CBIS''), S. Percoco, Responsible 
Sourcing Network (July 21, 2016) and CalPERS.
    \167\ See letters from US SIF and US SIF Foundation (July 14, 
2016) (``US SIF''), ICCR, Dana Investment, Sisters of Charity, CCF, 
Park, OIP, Sacred Heart, S.S. St. Francis, Friends, Everence, SSND, 
SSSF-Wisconsin, As You Sow, TSCRI, PC USA and CBIS.
    \168\ See letters from Chamber, FedEx, CGCIV, and Fenwick.
    \169\ See letters from Chamber, FedEx, and CGCIV.
    \170\ See letter from Fenwick. Another commenter stated that 
this information is immaterial, does not provide information about 
the size or scope of the business, and does not provide any clarity 
to the overall strategy of the company. See letter from United 
Health. Further, one commenter asserted that disclosures that comply 
with the current prescriptive requirement may not provide investors 
with the most appropriate information.
---------------------------------------------------------------------------

    With respect to whether anticipated material changes in the number 
of employees would be useful to investors, several commenters supported 
disclosure of employee turnover.\171\ Numerous commenters further 
recommended requiring registrants to distinguish among their total 
employees.\172\ Most of these commenters recommended requiring this 
disclosure for both registrants and their suppliers, and specified 
inclusion

[[Page 44370]]

of migrant, contract, or temporary workers.\173\
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    \171\ See letters from DHC Consulting, LGIM, Railpen, CalPERS, 
AFL-CIO, NYC Comptroller, AFSCME, CAQ, Domini Social, E&Y, Hermes 
Investment Management, and Cornerstone.
    \172\ See letters from ICCR, Dana Investment, DHC Consulting, 
Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, 
Friends, Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, PC USA, 
CBIS, GRI, US SIF, Railpen, CalPERS, AFL-CIO, CAQ, Domini Social, 
CalSTRS, Good Jobs First, Maryland Bar Securities Committee, 
Bloomberg, and NYC Comptroller.
    \173\ See letters from ICCR, Dana Investment, DHC Consulting, 
Sisters of Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, 
Friends, Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, PC USA, 
CBIS, GRI, and Good Jobs First.
---------------------------------------------------------------------------

    The Concept Release also solicited feedback on additional line-item 
disclosure requirements about a registrant's business that would 
improve the quality and consistency of disclosure, and specifically 
sought input on whether to require additional information about a 
registrant's employees or employment practices.\174\ A number of 
commenters advocated for greater human capital disclosure,\175\ with a 
variety of commenters recommending various specific disclosure topics, 
including:
---------------------------------------------------------------------------

    \174\ See Concept Release, supra note 6.
    \175\ See, e.g., letters from M. Ferguson (July 7, 2016), Norges 
Bank Investment Management (July 15, 2016), P. Linzmeyer (July 19, 
2016), LGIM, Railpen, Hermes Investment Management, NYC Comptroller, 
Addenda Capital, AFSCME, Working IDEAL (July 21, 2016), AFL-CIO, 
National Partnership for Women & Families (Aug. 8, 2016), and 
Rockefeller & Co., Inc. (July 21, 2016), and Sen. Warner.
---------------------------------------------------------------------------

     Worker recruitment, employment practices, and hiring 
practices;\176\
---------------------------------------------------------------------------

    \176\ See letters from ICCR, Dana Investment, Sisters of 
Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, 
Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, CalPERS, PC USA, 
CBIS, and Domini Social.
---------------------------------------------------------------------------

     Employee benefits and grievance mechanisms; \177\
---------------------------------------------------------------------------

    \177\ See letters from ICCR, Dana Investment, Sisters of 
Charity, CCF, Park, OIP, Sacred Heart, S.S. St. Francis, Friends, 
Everence, SSND, SSSF-Wisconsin, As You Sow, TSCRI, PC USA, and CBIS.
---------------------------------------------------------------------------

     ''Employee engagement'' or investment in employee 
training; \178\
---------------------------------------------------------------------------

    \178\ See letters from LGIM, Railpen, CalPERS, AFL-CIO, NYC 
Comptroller, AFSCME, Addenda Capital and Hermes Investment 
Management. See also letter from Joseph V. Carcello, Chair, Investor 
as Owner Subcommittee, on behalf of Subcommittee members, of the 
SEC's Investor Advisory Committee (November 22, 2016) (in response 
to FAST Act--SEC Required Study on Modernization and Simplification 
of Regulation S-K).
---------------------------------------------------------------------------

     Workplace health and safety; \179\
---------------------------------------------------------------------------

    \179\ See letters from LGIM, Railpen, CalPERS, NYC Comptroller, 
AFSCME, AFL-CIO, and US SIF.
---------------------------------------------------------------------------

     Strategies and goals related to human capital management 
and legal or regulatory proceedings related to employee management; 
\180\
---------------------------------------------------------------------------

    \180\ See letters from AFL-CIO and Domini Social.
---------------------------------------------------------------------------

     Whether employees are covered by collective bargaining 
agreements; \181\ and
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    \181\ See letter from Good Jobs First.
---------------------------------------------------------------------------

     Employee compensation or incentive structures.\182\
---------------------------------------------------------------------------

    \182\ See letters from NYC Comptroller, AFL-CIO, CalPERS, and 
Domini Social.
---------------------------------------------------------------------------

    We also 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 (the ``Human Capital 
Rulemaking Petition'').\183\ Many of the comment letters received in 
support of the Human Capital Rulemaking Petition asserted the 
importance of human capital management in assessing the potential value 
and performance of a company over the long term.\184\ Further, a number 
of commenters asserted that companies with poor management of human 
capital may face operational, legal, and reputational risks while, in 
contrast, companies with strong human capital management may develop a 
competitive advantage.\185\ While the Human Capital Rulemaking Petition 
did not include specific recommendations for disclosure requirements 
related to human capital management, it included categories of 
information that it characterized as fundamental to furthering 
investors' understanding of how well a company is managing its human 
capital.\186\
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    \183\ 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), available at https://www.sec.gov/rules/petitions/2017/petn4-711.pdf and related comments 
available at https://www.sec.gov/comments/4-711/4-711.htm. We refer 
to these letters throughout as ``Human Capital Rulemaking Petition'' 
letters.
    \184\ See, e.g., letters from British Columbia Municipal Pension 
Board of Trustees (Sept. 29, 2017) [Human Capital Rulemaking 
Petition letter], CalPERS and CalSTRS (July 10, 2017) (``CalPERS and 
CalSTRS 1'') [Human Capital Rulemaking Petition letter], Center for 
Safety and Health Sustainability (June 15, 2018) (``Center for 
Safety'') [Human Capital Rulemaking Petition letter], David F. 
Larcker (Dec. 15, 2017) [Human Capital Rulemaking Petition letter], 
League of Allies (Apr. 25, 2018) [Human Capital Rulemaking Petition 
letter], and AFL-CIO (Sept. 22, 2017) [Human Capital Rulemaking 
Petition letter].
    \185\ See letters from Australian Council of Superannuation 
Investors (Nov. 20, 2017) [Human Capital Rulemaking Petition 
letter], British Columbia Municipal Pension Board of Trustees, 
CalPERS and CalSTRS 1, and Center for Safety.
    \186\ See Human Capital Rulemaking Petition, supra note 183 
(suggesting that the key categories of information are: Workforce 
demographics; workforce stability; workforce composition; workforce 
skills and capabilities; workforce culture and empowerment; 
workforce health and safety; workforce productivity; human rights 
commitments and their implementation; workforce compensation and 
incentives).
---------------------------------------------------------------------------

    Item 101(c)(1)(xiii) dates back to a time when companies relied 
significantly on plant, property, and equipment to drive value. At that 
time, a prescriptive requirement to disclose the number of employees 
may have been an effective means to elicit information material to an 
investment decision. Today, intangible assets represent an essential 
resource for many companies.\187\ Because human capital may represent 
an important resource and driver of performance for certain companies, 
and as part of our efforts to modernize disclosure, we propose to amend 
Item 101(c) to refocus registrants' human capital resources 
disclosures.\188\ Specifically, we propose replacing the current 
requirement to disclose the number of employees with a requirement to 
disclose 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. We recognize that the exact measures or objectives included 
in a registrant's human capital resource disclosure may change over 
time and may depend on the industry. The proposed amendment provides 
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.
---------------------------------------------------------------------------

    \187\ See infra note 279.
    \188\ See proposed Item 101(c)(2)(ii).
---------------------------------------------------------------------------

    In assessing the best way to approach disclosure regarding human 
capital, we were mindful that each industry, and even each company 
within a specific industry, has its own human capital considerations, 
and that those considerations may evolve over time. In light of this 
fact, and with the principle of materiality in mind, it is our view 
that prescribing fixed, specific line item disclosures in this area for 
all registrants would not result in the most meaningful 
disclosure.\189\ Instead, we believe that investors would be better 
served by understanding how each company looks at its human capital 
and, in particular, where management focuses its attention in this 
space. The intent of the proposed requirement is to elicit, to the 
extent material to an understanding of the registrant's business, 
disclosures regarding human capital that allow investors to better 
understand and evaluate this company resource and to

[[Page 44371]]

see through the eyes of management how this resource is managed.
---------------------------------------------------------------------------

    \189\ The Investor Advisory Committee recently recommended that 
the SEC take measures to improve the disclosure of a registrant's 
human capital management, and suggested that ``any 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 
(March 28, 2019), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/human-capital-disclosure-recommendation.pdf.
---------------------------------------------------------------------------

Request for Comment
    12. Should we shift to a more principles-based approach for Item 
101(c), as proposed? Would registrants find it difficult to apply the 
principles-based requirements?
    13. Would the proposed principles-based requirements elicit 
information that is material to an investment decision? If not, how 
might Item 101(c) be further improved? Are there any additional 
disclosure topics that we should include in Item 101(c) to facilitate 
disclosure? Alternatively, should we exclude any of our proposed 
disclosure topics?
    14. Should we instead require disclosure of any or all of the 
topics addressed in our proposed examples? If so, which topics? Should 
we require other types of business information? If so, what 
information?
    15. Should we retain Item 101(c)'s distinction between disclosure 
topics for which segment disclosure should be the primary focus, and 
those for which the focus should be on the registrant's business taken 
as a whole, as proposed? If so, is our allocation of the listed 
disclosure topics into the two categories appropriate?
    16. We are proposing to amend Item 101(c) to include as a listed 
disclosure topic the status of development efforts for new or enhanced 
products, trends in market demand and competitive conditions. Would the 
disclosure elicited in response to this amendment overlap with the 
disclosure provided in response to our proposed amendment to Item 
101(a) to include material changes to business strategy as a disclosure 
topic? If so, should business strategy changes be included as a listed 
disclosure topic in Item 101(c) instead of Item 101(a)?
    17. Currently, the duration and effect of copyright and trade 
secret protection is not included within the scope of Item 101(c) 
disclosure. Should we include it as a listed disclosure topic that 
could be provided?
    18. Is backlog typically discussed in MD&A or is it better suited 
for disclosure under Item 101(c) to the extent material? Similarly, is 
working capital typically sufficiently disclosed in MD&A or is it 
better addressed under Item 101(c)?
    19. Should the extent to which the business is or may be seasonal 
be included as a listed disclosure topic, as proposed? Alternatively, 
should we require this disclosure in all circumstances? We note that 
fourth quarter disclosure about the extent to which the business of a 
registrant or its segment(s) is or may be seasonal may not be elicited 
by U.S. GAAP. We further note that there is no longer a separate 
seasonality instruction to MD&A. Do these considerations support the 
continued inclusion of seasonal aspects of a registrant's business, to 
the extent material to the understanding of a registrant's business, as 
a listed disclosure topic?
    20. Should we include as a listed disclosure topic the material 
effects of compliance with material government regulations, as 
proposed, or should we focus more narrowly on compliance with 
environmental regulations, as currently required under Item 101(c)? 
Would the proposed more principles-based approach to governmental 
regulatory compliance disclosure elicit the appropriate level of 
disclosure about environmental and foreign regulatory risks? If not, 
are there more specific disclosures that we should require? Should we 
continue to include material estimated capital expenditures for 
environmental control facilities as a disclosure topic under Item 
101(c)?
    21. Should disclosure regarding human capital resources, including 
any material human capital measures or objectives that management 
focuses on in managing the business, be included under Item 101(c) as a 
listed disclosure topic, as proposed? Should we define human capital? 
If so, how?
    22. With respect to human capital resource disclosure, should we 
provide non-exclusive examples of the types of measures or objectives 
that management may focus on in managing the business, such as, 
depending on the nature of the registrant's business and workforce, 
measures or objectives that address the attraction, development, and 
retention of personnel, as proposed? Would providing specific examples 
potentially result in disclosure that is immaterial and not tailored to 
a registrant's specific business? Would not including such examples 
result in a failure to elicit information that is material and in some 
cases comparable across different issuers?
    23. With respect to human capital resource disclosure, should we 
include other non-exclusive examples of measures or objectives that may 
be material, such as the number and types of employees, including the 
number of full-time, part-time, seasonal and temporary workers, to the 
extent disclosure of such information would be material to an 
understanding of the registrant's business? Could other examples 
include, depending on the nature of the registrant's business and 
workforce: Measures with respect to the stability of the workforce, 
such as voluntary and involuntary turnover rates; measures regarding 
average hours of training per employee per year; information regarding 
human capital trends, such as competitive conditions and internal rates 
of hiring and promotion; measures regarding worker productivity; and 
the progress that management has made with respect to any objectives it 
has set regarding its human capital resources? Would providing specific 
examples potentially result in disclosure that is immaterial and not 
tailored to a registrant's specific business? Would not including such 
examples result in a failure to elicit information that is material and 
in some cases comparable across different issuers?
    24. Should we retain an explicit requirement for registrants to 
disclose the number of their employees? Alternatively, should we permit 
registrants to disclose a range of the number of its employees and/or a 
range for certain types of employees?
    25. Foreign private issuers that file registration statements on 
Forms F-1, F-3, and F-4 are not subject to Item 101 and instead must 
meet the business disclosure requirements of Form 20-F. Should we amend 
Form 20-F to require the disclosure of human capital resources, 
including any human capital measures or objectives that management 
focuses on in managing the business, to the extent material to an 
understanding of the registrant's business? Would such disclosure 
present a significant challenge to foreign private issuers to the 
extent that it is not required in other jurisdictions? Are there other 
proposed Item 101 disclosure topics that we should require in Form 20-
F?
    26. The Commission revised Form 20-F in 1999 to conform in large 
part to the international disclosure standards endorsed by the 
International Organization of Securities Commissions (``IOSCO'') for 
the non-financial statement portions of a disclosure document, which 
have served as the basis for the disclosure requirements in several 
foreign jurisdictions.\190\ One of the objectives of the IOSCO 
standards was to facilitate the cross-border flow of securities and 
capital by promoting the use of a single disclosure document that would 
be accepted in multiple jurisdictions.\191\ If we revise Form 20-F to 
include any of the proposed Item 101 amendments, would such revision 
reduce the ability of foreign private

[[Page 44372]]

issuers to use a single document in multiple jurisdictions?
---------------------------------------------------------------------------

    \190\ See International Disclosure Standards, Release No. 33-
7745 (September 28, 1999) [64 FR 53900 (Oct. 5, 1999)].
    \191\ See id. at 53901.
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    27. The disclosure requirements regarding a foreign private 
issuer's business under Form 20-F are largely prescriptive. Would 
amending Form 20-F to make the business disclosure more principles-
based represent a more significant change, or impose a greater 
challenge, for foreign private issuer registrants than the proposed 
Item 101 amendments would for domestic registrants? Would the benefits 
of making Form 20-F more principles-based nevertheless justify such an 
amendment?
    28. Much of the disclosure required under Item 101(h) for smaller 
reporting companies is prescriptive. Should we retain this prescriptive 
approach or adopt a more principles-based approach, similar to the 
proposed amendments to Items 101(a) and (c), under Item 101(h)? Would 
smaller reporting companies find it difficult to apply a principles-
based approach? Should we consider changes to any of the listed 
disclosure items in Item 101(h)(1) through (6)?
    29. We are proposing to amend Form S-4 to conform it to changes 
made to Item 101 pursuant to the DUSTR Adopting Release as well as to 
the proposed revisions to Item 101(c) discussed above.\192\ Are the 
proposed revisions to Form S-4 appropriate?
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    \192\ See supra note 85.
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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.\193\ Item 103 also 
requires disclosure of the name of the court or agency in which the 
proceedings are pending, the date instituted, the principal parties 
thereto and a description of the factual basis alleged to underlie the 
proceeding and the relief sought.\194\ Similar information is to be 
included for such proceedings known to be contemplated by governmental 
authorities.\195\
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    \193\ 17 CFR 229.103.
    \194\ See id.
    \195\ See id.
---------------------------------------------------------------------------

    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.\196\ In 1935, the Commission 
included in Form A-2 a requirement for a brief description of material, 
pending legal proceedings and proceedings by governmental authorities, 
where such proceedings depart from the ordinary routine litigation 
incidental to the kind of business conducted by the registrant or its 
subsidiaries.\197\ The requirement was later expanded in Form S-1 \198\ 
to include: (1) A requirement to identify the court or agency, the date 
instituted, and the names of the principal parties; (2) 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; 
and (3) an exemption for disclosure of proceedings involving claims of 
less than 15 percent of the registrant's consolidated current 
assets.\199\
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    \196\ See Form A-1, Item 17, adopted in Release No. 33-5 (July 
6, 1933) [not published in the Federal Register].
    \197\ See Form A-2, Item 40, adopted in Release No. 33-276 (Jan. 
14, 1935) [not published in the Federal Register].
    \198\ 17 CFR 239.11.
    \199\ See Application for Registration of Securities, Release 
No. 33-3584 (Oct. 21, 1955) [20 FR 8284]. See also Forms for 
Registration Statements; Notice of Proposed Rulemaking, Release No. 
33-3540 (Apr. 26, 1955) [20 FR 2965].
---------------------------------------------------------------------------

    As discussed in greater detail below, in connection with NEPA,\200\ 
the legal proceedings disclosure requirement was expanded to require 
additional disclosure about environmental matters.\201\ At the same 
time a requirement to disclose the factual basis of proceedings and the 
nature of relief sought was added, and the disclosure threshold was 
reduced from 15 percent to 10 percent.\202\ In 1978, the requirement 
was also moved from the forms to Item 5 of Regulation S-K.\203\
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    \200\ See NEPA, supra note 146.
    \201\ See Environmental Disclosure Adopting Release, supra note 
147.
    \202\ See id.
    \203\ See Integrated Reporting Requirements: Directors and 
Officers, Management Remuneration, Legal Proceedings, Principal 
Security Holders and Security Holdings of Management, Release No. 
33-5949 (July 28, 1978) [43 FR 34402].
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    In the DUSTR Proposing Release, the Commission solicited comments 
about whether to retain, modify, eliminate, or refer the Item 103 
disclosure requirements to the Financial Accounting Standards Board 
(``FASB'') for potential incorporation into U.S. GAAP.\204\ Many 
commenters opposed the integration of Item 103 into U.S. GAAP.\205\ A 
number of commenters \206\ stated that the objectives of Item 103 and 
U.S. GAAP differ,\207\ and some of these commenters \208\ indicated 
that a better articulation of objectives may be warranted. Commenters 
further expressed concern that the integration could lead to increased 
disclosure of immaterial items and may eliminate the safe-harbor 
protections currently afforded to forward-looking statements related to 
legal proceedings under Regulation S-K.\209\
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    \204\ See DUSTR Proposing Release, supra note 129 at 51633.
    \205\ See, e.g., letters from Center for Audit Quality (Oct. 3, 
2016) (``CAQ 1'') [DUSTR letter], Corporate Governance Coalition for 
Investor Value (Oct. 27, 2016) (``CGCIV 1'') [DUSTR letter], Davis 
Polk & Wardwell LLP (Nov. 2, 2016) (``Davis 1'') [DUSTR letter], 
FedEx Corporation (Nov. 2, 2016) (``FedEx 1'') [DUSTR letter], 
Shearman & Sterling LLP (Dec. 1, 2016) (``Shearman 1'') [DUSTR 
letter], and U.S. Chamber of Commerce (Oct. 27, 2016) (``Chamber 
1'') [DUSTR letter].
    \206\ See, e.g., letters from CAQ 1 and NAREIT (Oct. 28, 2016) 
(``NAREIT 1'') [DUSTR letter].
    \207\ Item 103 is intended to provide a description of material 
pending legal proceedings, while U.S. GAAP is designed to provide 
information consistent with the accounting model for loss 
contingencies.
    \208\ See, e.g., letters from CAQ 1 and Davis 1.
    \209\ See letters from CGCIV 1, Davis 1, FedEx 1, NAREIT 1, 
Shearman 1, and Chamber 1.
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    Some commenters recommended the deletion of Item 103 altogether or, 
at a minimum, some of the disclosure requirements contained 
therein.\210\ For example, one of these commenters asserted that U.S. 
GAAP, together with Items 303 and the former 503(c) (now Item 105) of 
Regulation S-K, elicits the appropriate level of disclosure of material 
legal proceedings to inform investment and voting decisions of a 
reasonable investor.\211\
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    \210\ See letters from Davis 1, Edison Electric Institute and 
American Gas Association Accounting Advisory Council (Nov. 2, 2016) 
(``EEI and AGA 1'') [DUSTR letter] and Grant Thornton LLP (Nov. 1, 
2016) [DUSTR letter].
    \211\ See letter from Davis 1.
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    In response to concerns expressed by commenters, the Commission 
decided to retain the disclosure requirements in Item 103 without 
amendment and without referral to the FASB for potential incorporation 
into U.S. GAAP, indicating that further consideration was warranted 
with respect to the implications of potential changes to these 
requirements.\212\
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    \212\ See DUSTR Adopting Release, supra note 62.
---------------------------------------------------------------------------

    In light of 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 are proposing the 
following amendments.\213\
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    \213\ In addition to the proposed amendments discussed below, we 
also are proposing to reorganize Item 103 to incorporate the 
contents of the current instructions into the text of Item 103 and 
to eliminate the instructions.

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[[Page 44373]]

1. Expressly Provide for the use of Hyperlinks or Cross-References To 
Avoid Repetitive Disclosure
    Although Item 103 of Regulation S-K and U.S. GAAP differ in certain 
respects, they also have overlapping disclosure requirements.\214\ 
Thus, in order to comply with Item 103, registrants commonly repeat 
some or all of the disclosures that are provided elsewhere in the 
document, such as, for example, in the notes to the financial 
statements under U.S. GAAP, the MD&A, and the Risk Factors sections.
---------------------------------------------------------------------------

    \214\ See supra note 207 and infra note 235.
---------------------------------------------------------------------------

    In an effort to encourage registrants to avoid duplicative 
disclosure, we propose to revise Item 103 to expressly state that some 
or all of the required information may be provided by including 
hyperlinks or cross-references to legal proceedings disclosure located 
elsewhere in the document.
2. Update the Disclosure Threshold for Environmental Proceedings in 
Which the Government Is a Party
    Instruction 5.C. to Item 103 specifically requires disclosure of 
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.\215\
---------------------------------------------------------------------------

    \215\ 17 CFR 229.103.
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    Pursuant to NEPA, Congress required all Federal agencies to include 
consideration of the environment in regulatory action.\216\ The 
Commission's initial action in the environmental area came in 1971 when 
an interpretive release was issued alerting registrants to the 
potential disclosure obligations that could arise from material 
environmental litigation and the material effects of compliance with 
environmental laws.\217\ After an assessment of the disclosure elicited 
under this release, the Commission determined that more specific 
disclosure standards were necessary and the Commission adopted 
amendments to certain registration and reporting forms in 1973.\218\ 
The amendments required disclosure of (1) 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, and (2) any material pending or contemplated administrative 
or judicial proceedings involving Federal, state or local environmental 
laws, as well as any environmental proceeding by a governmental 
authority.\219\ While these amendments called for disclosure of all 
environmental proceedings involving governmental authorities, the 
Commission recognized that a complete description of each such 
proceeding might cause disclosure documents to be excessively detailed 
without a commensurate benefit to investors.\220\ Therefore, the 
Commission also adopted at that time a provision which allowed 
registrants to group similar governmental proceedings and to describe 
them generally.\221\
---------------------------------------------------------------------------

    \216\ See NEPA, supra note 146.
    \217\ See Disclosures Pertaining to Matters Involving the 
Environment and Civil Rights, Release No. 33-5170 (July 19, 1971) 
[36 FR 13989 (July 29, 1971)] (``The Commission's requirements for 
describing a registrant's business on the forms and rules under the 
Securities and Exchange Act call for disclosure, if material, when 
compliance with statutory requirements . . . may materially affect 
the earning power of the business, or cause material changes in 
registrant's business done or intended to be done. Further, the 
Commission's disclosure requirements relating to legal proceedings 
call for disclosure, where material, of proceedings arising . . . 
under statutes, Federal, state or local, regulating the discharge of 
materials into the environment, or otherwise specifically relating 
to the protection of the environment . . . .'').
    \218\ See Environmental Disclosure Adopting Release, supra note 
147.
    \219\ See id.
    \220\ See id.
    \221\ See id.
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    As noted earlier,\222\ in 1975 the Commission initiated public 
proceedings \223\ to elicit comments on whether further rulemaking in 
the environmental area was appropriate. The Commission solicited 
comments on a number of issues affecting environmental disclosure, such 
as the relevance of those disclosures to informed voting 
decisions.\224\ The request for comments resulted in certain staff 
recommendations, as set forth in the 1979 Staff Report on Corporate 
Accountability, concerning the Commission's environmental disclosure 
provisions.\225\ The Staff Report concluded that disclosure of all 
environmental proceedings to which a governmental authority is a party 
resulted in lengthy disclosures which obscured more significant 
environmental proceedings.\226\ The Staff Report stated that ``more 
focused disclosure could be more beneficial to investors and 
shareholders'' and recommended that the disclosure requirement be 
amended to allow for a materiality threshold, instead of requiring 
disclosure of all such proceedings.\227\
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    \222\ See supra notes 148 and 149 and accompanying text.
    \223\ See Release No. 33-5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 
18, 1975)]. As previously noted, as a result of these proceedings, 
the Commission amended its forms in 1976 to specifically require 
disclosure of any material estimated capital expenditures for 
environmental control facilities for the remainder of the 
registrant's current fiscal year and its succeeding fiscal year, and 
for any further periods that are deemed material. See Release No. 
33-5704, supra note 150.
    \224\ See Release No. 33-5569, supra note 223, at 7015.
    \225\ See Staff Report, supra note 148, at 250-86.
    \226\ See id.
    \227\ See id.
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    Consistent with the Staff Report,\228\ the Commission added 
environmental disclosure thresholds (including Instruction 5.C.) to 
current Item 103 in 1982.\229\ The 1982 amendments included new 
subparts A, B, and C to Instruction 5 of Item 103, with subpart C 
permitting registrants not to disclose environmental proceedings to 
which the government is a party if the registrant reasonably believes 
that monetary sanctions resulting from the proceedings will be less 
than $100,000.\230\ The 1981 proposing release for these amendments 
indicated that the $100,000 threshold was based in part on actual fines 
assessed in environmental proceedings at the time.\231\ In that 
release, the Commission stated its belief that disclosure of fines by 
governmental authorities may be of particular importance in assessing a 
registrant's environmental compliance problems, and that a disclosure 
threshold based on governmental fines may be more indicative of 
possible illegality and conduct contrary to public policy than other 
measures.\232\
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    \228\ See id.
    \229\ See 1982 Integrated Disclosure Adopting Release, supra 
note 9.
    \230\ See id.
    \231\ 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)].
    \232\ See id.
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    Since the current requirements in Instruction 5.C. to Item 103 were 
adopted in 1982, the Commission has explored ways in which 
environmental disclosures could be improved for investors while not 
unduly burdening registrants. For example, the 1996 Report of the Task 
Force on Disclosure Simplification recommended replacing the $100,000 
threshold with a general materiality standard or, alternatively, 
recommended raising the dollar threshold that triggers disclosure.\233\ 
The Task Force made this recommendation noting that in some 
circumstances the ``one size fits all'' approach may result in the 
disclosure of information about environmental proceedings not material 
to an

[[Page 44374]]

investment decision.\234\ However, the recommended changes were not 
proposed.
---------------------------------------------------------------------------

    \233\ See Report of the Task Force on Disclosure Simplification 
(Mar. 5, 1996), available at https://www.sec.gov/news/studies/smpl.htm.
    \234\ See id.
---------------------------------------------------------------------------

    Although the DUSTR Proposing Release did not specifically seek 
comment on the bright-line $100,000 threshold in Instruction 5.C. to 
Item 103,\235\ some commenters expressed opposition to 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.\236\ These commenters expressed concern 
about using a materiality standard for disclosure because it may reduce 
the information made available to investors or diminish comparability 
of registrants.\237\
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    \235\ The DUSTR Proposing Release more generally discussed the 
overlap in disclosure that could result from compliance with the 
requirements under Item 103 and U.S. GAAP, which requires the 
disclosure of loss contingencies (see ASC 450-20), and noted the 
differences between the two sets of requirements. See DUSTR 
Proposing Release, supra note 129, at 51633-51634. Following a 
discussion of those differences, the Commission solicited comment on 
whether inclusion of the Item 103 disclosures in the audited 
financial statements would create significant burdens for issuers 
and auditors. See DUSTR Proposing Release, supra note 129 at 51635. 
Because of the concerns expressed by the many commenters that 
opposed the integration of Item 103 into U.S. GAAP, the Commission 
did not amend the Item 103 disclosure requirements. See DUSTR 
Adopting Release, supra note 62, at 50174.
    \236\ See, e.g., letters from AFL-CIO (Oct. 31, 2016) [DUSTR 
letter], CalPERS (Nov. 2, 2016) [DUSTR letter], CFA Institute (Dec. 
7, 2016) [DUSTR letter], Public Citizen (Oct. 18, 2016) [DUSTR 
letter], and R.G. Associates, Inc. (Nov. 2, 2016) [DUSTR letter].
    \237\ See id.
---------------------------------------------------------------------------

    Other commenters supported eliminating the bright-line thresholds 
and generally supported a more principles-based disclosure 
framework.\238\ These commenters also asserted that materiality is a 
better disclosure standard because certain of the existing bright-line 
thresholds result in disclosure that may not be material to investors, 
may obscure material information and may be costly to provide.\239\
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    \238\ See, e.g., letters from CAQ 1, CGCIV 1, Chamber 1, The 
Clearing House Association L.L.C. (Oct. 28, 2016) (``Clearing 
House''), Davis 1, and Financial Executives International (Oct. 27, 
2016) [DUSTR letters].
    \239\ See, e.g., letters from CAQ 1, CGCIV 1, Clearing House, 
Davis 1, Deloitte & Touche LLP (Oct. 5, 2016) [DUSTR letter], EEI 
and AGA 1, NAREIT 1, Shearman 1, and Chamber 1.
---------------------------------------------------------------------------

    We continue to believe that a disclosure threshold based on the 
imposition of a governmental fine is appropriate because such a fine 
may be important for investors in assessing a registrant's 
environmental compliance.\240\ A disclosure threshold based on 
imposition of a governmental fine also provides a useful benchmark for 
registrants when determining whether a particular environmental 
proceeding, which can be factually and legally complex, should be 
disclosed. Such a disclosure threshold also promotes comparability 
among registrants in the disclosure of environmental proceedings. For 
these reasons, we propose to retain a disclosure threshold for 
environmental proceedings based on the imposition of a governmental 
fine.
---------------------------------------------------------------------------

    \240\ See supra note 232 and accompanying text.
---------------------------------------------------------------------------

    However, as the $100,000 disclosure threshold for environmental 
proceedings in which the government is a party has not been changed 
since it was adopted in 1982, we propose to increase this threshold to 
$300,000 to adjust it for inflation. Using the May 1981 date of the 
proposing release in which the $100,000 threshold was first mentioned 
and using the Consumer Price Index (CPI) Inflation Calculator, we 
estimate that the threshold would be $285,180.40 as of May 2019.\241\ 
For ease of reference, we propose rounding this amount up to $300,000. 
This increase would reflect an inflation adjustment to modernize this 
disclosure requirement.
---------------------------------------------------------------------------

    \241\ See CPI Inflation Calculator, available at https://data.bls.gov/cgi-bin/cpicalc.pl. The calculator uses the Consumer 
Price Index for All Urban Consumers (CPI-U) U.S. city average series 
for all items, not seasonally adjusted.
---------------------------------------------------------------------------

Request for Comment
    30. Would our proposed revisions to Item 103 improve disclosures 
required by the item? Are there different or additional revisions we 
should consider to improve Item 103 disclosure?
    31. Should we expressly provide for the use of hyperlinks or cross-
references, as proposed? Would the use of multiple hyperlinks be 
cumbersome for investors? Are there alternative recommendations that 
would more effectively decrease duplicative disclosure?
    32. Should we adjust the $100,000 threshold for environmental 
proceedings in which the government is a party in Item 103 for 
inflation, as proposed? Should this threshold be adjusted for inflation 
periodically, such as every three years or some other interval? Does 
CPI inflation provide an appropriate adjustment factor for 
environmental proceedings? If not, what adjustment factor should we 
use?
    33. Should we instead adopt an alternative threshold for 
environmental proceedings disclosure? If so, what threshold should we 
use, and what data or sources should provide the basis for the 
alternative threshold? Should we raise the dollar threshold above the 
proposed $300,000 threshold, e.g., to $500,000, $750,000, or 
$1,000,000, and if so, what would be the basis for that increase? Are 
there alternative approaches (e.g., a materiality threshold) that would 
work better than a bright-line dollar threshold? If so, describe the 
approach and explain why it would be preferable to our proposal.
    34. Form 20-F requires a foreign private issuer to provide 
information on any legal or arbitration proceedings, including 
governmental proceedings pending or known to be contemplated, which may 
have, or have had in the recent past, significant effects on the 
company's financial position or profitability.\242\ Similar to the 
proposed amendment to Item 103, should we amend Form 20-F to expressly 
state that some or all of the required information about legal 
proceedings may be provided by including hyperlinks or cross-references 
to legal proceedings disclosure located elsewhere? Should we amend Form 
20-F to clarify that a foreign private issuer is only required to 
disclose material legal proceedings? Would either amendment reduce a 
foreign private issuer's ability to use a single disclosure document in 
multiple jurisdictions?
---------------------------------------------------------------------------

    \242\ See Form 20-F, Item 8.A.7.
---------------------------------------------------------------------------

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.\243\ 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.\244\
---------------------------------------------------------------------------

    \243\ 17 CFR 229.105. As previously noted, in the FAST Act 
Adopting Release the Commission rescinded Item 503(c) of Regulation 
S-K and replaced it with new Item 105 of Regulation S-K. See supra 
note 1. 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]. See Item 1A of Form 10, Form 10-K, and Form 10-Q.
    \244\ See id.
---------------------------------------------------------------------------

    The Concept Release solicited comments on how to improve risk 
factor disclosure and sought feedback on several potential approaches 
aimed at facilitating more meaningful disclosure.\245\ Comments 
received were

[[Page 44375]]

wide-ranging and no consensus emerged. Numerous commenters supported a 
flexible or principles-based requirement.\246\ Several commenters 
recommended integrating risk factor disclosures with other non-risk and 
risk-related disclosures.\247\ Some commenters recommended further 
guidance on risk factor disclosure to illustrate what registrants 
should do to meet the Item's disclosure objectives.\248\ Other 
commenters supported retaining the current approach to risk factors and 
opposed any changes to the current risk factor guidance and 
disclosure.\249\
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    \245\ See Concept Release, supra note 6. The potential 
approaches discussed included, for example, requiring that each risk 
factor be accompanied by a specific discussion of how the registrant 
is addressing the risk, requiring registrants to discuss the 
probability of occurrence and the effect on performance of each risk 
factor and requiring registrants to describe their assessment of 
risks.
    \246\ See letters from CAQ, AFLAC, Chamber, FedEx, CGCIV, NAM, 
ACC, SIFMA, E&Y, EEI and AGA, Wilson Sonsini, NAREIT, Davis, 
Fenwick, NIRI, Shearman, PWC, General Motors, and Financial 
Executives International.
    \247\ See letters from PNC, SIFMA, CalPERS, the Carbon Tracker 
Initiative, Medical Benefits Trust, E&Y, and BDO.
    \248\ See letters from NYSSCPA, General Motors, and Financial 
Executives International.
    \249\ See letters from Ball Corporation, API, and Chevron.
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    The revisions that we are proposing to Item 105 are intended 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 varies, studies show that risk factor 
disclosures have increased in recent years.\250\ 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 10 percent, and that this increase in risk 
factor word count may not be associated with better disclosure.\251\
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    \250\ See PricewaterhouseCoopers LLP, Stay Informed, 2012 
Financial Reporting Survey: Energy industry current trends in SEC 
reporting, Feb. 2013, available at https://www.pwc.com/en_GX/gx/oil-gas-energy/publications/pdfs/pwc-sec-financial-reporting-energy.pdf 
(``2012 PWC Report''). This report reviewed financial reporting 
trends of 87 registrants with market capitalizations of at least $1 
billion that apply U.S. GAAP in the following subsectors of the 
energy industry: Downstream, drillers, independent oil and gas, 
major integrated oil and gas, midstream and oil field equipment and 
services. Based on this study, the average number of risk factors in 
the major integrated oil and gas sector was 12 while the average 
number of risk factors in the midstream sector was 51. In one 
sector, the maximum number of risk factors was 95. See also 
PricewaterhouseCoopers LLP, Stay Informed: 2014 technology financial 
reporting trends, Aug. 2014, available at https://www.pwc.com/en_US/us/technology/publications/assets/pwc-2014-technology-financial-reporting-trends.pdf (reviewing the annual and periodic filings of 
135 registrants in the software and internet, computers and 
networking, and semiconductors sectors, and finding that over half 
of the registrants surveyed repeated all of their risk factors in 
their quarterly filings); and Travis Dyer, Mark Lang and Lorien 
Stice-Lawrence, The Ever-Expanding 10-K: Why Are 10-Ks Getting So 
Much Longer (and Does It Matter)?, The Columbia Law School Blue Sky 
Blog (May 5, 2016), available at https://clsbluesky.law.columbia.edu/2016/05/05/the-ever-expanding-10-k-why-are-10-ks-getting-so-much-longer-and-does-it-matter/ (reporting the results of a study of Form 
10-Ks filed between 1996 and 2013 and finding that the length of 
Form10-K has more than doubled in word length, with forward-looking 
risk factor disclosures being one of three substantial reasons for 
this increase, and contributing to Form 10-Ks becoming more 
redundant and complex).
    \251\ See Anne Beatty et al., Sometimes Less is More: Evidence 
from Financial Constraints Risk Factor Disclosures, Mar. 2015, 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2186589. 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.
---------------------------------------------------------------------------

    A contributing factor to the increased length of risk factor 
disclosure appears to be the inclusion of generic, boilerplate risks 
that could apply to any offering or registrant. Although Item 105 
instructs registrants not to present risks that could apply to any 
registrant, and despite Commission and staff guidance stating that risk 
factors should be focused on the ``most significant'' risks and should 
not be boilerplate,\252\ 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.
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    \252\ 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.
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    To address these concerns, we are proposing the following three 
amendments to the Item 105 risk factor disclosure requirement.
1. Require Summary Risk Factor Disclosure if the Risk Factor Section 
Exceeds 15 Pages
    As a way of addressing the length of risk factor disclosure, the 
Commission has previously considered requiring a page limit for risk 
factor disclosure.\253\ However, the Commission has not adopted such a 
requirement to date in light of comments received in response to prior 
initiatives. For example, while the Concept Release did not seek 
specific feedback on reducing or limiting the length of risk factor 
disclosure, several commenters nonetheless opposed a page limit.\254\ 
Commenters attributed the growing length of risk factor disclosure to 
the risk of litigation associated with failing to disclose risks if 
events turn negative.\255\ Commenters also stated that many companies 
will continue to disclose generic risks unless assured that litigation 
will not result from the failure to do so.\256\ Similar comments were 
received in response to the general solicitation of comment on the 
Disclosure Effectiveness Initiative.\257\
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    \253\ 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.
    \254\ See letters from ACC, API, Chevron, CAQ, PNC, Wilson 
Sonsini, Maryland Bar Securities Committee, PWC, CalPERS, Four 
Twenty Seven, Fenwick, and NYSSCPA.
    \255\ See letters from Wilson Sonsini, Maryland State Bar, and 
PNC.
    \256\ See id.
    \257\ See, e.g., letter from The Society of Corporate 
Secretaries and Governance Professionals (Sept. 10, 2014) 
[Disclosure Effectiveness letter] (referencing the Commission's 
proposal to limit the number of risk factors included in a filing in 
connection with the Commission's Plain English initiative and 
comments received in connection with that initiative, and quoting 
approvingly from the letter from the Committee on Securities 
Regulation of the Business Law Section of the New York State Bar 
Association (Mar. 21, 1997), available at https://www.sec.gov/rules/proposed/s7397/gutman1.htm, that ``no issuer should ever be put in 
the position of choosing significant material risks in order to 
satisfy a numerical limitation'').
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    The Concept Release sought input on whether to require summary risk 
factor disclosure in addition to complete risk factor disclosure and 
whether highlighting information in a summary would help investors 
better understand a registrant's risks.\258\ Several commenters opposed 
summary risk factor disclosure, stating that a summary would not add 
value and would result in repetition of disclosure.\259\ Further, some 
commenters noted that registrants provide headings before each specific 
risk factor, which effectively act as a summary.\260\ Some commenters

[[Page 44376]]

specified that a summary should be encouraged but not required.\261\
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    \258\ See Concept Release, supra note 6. Item 3(b) to Form S-11 
includes such a requirement, stating that ``[w]here 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.'' See 17 CFR 239.18. 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.
    \259\ See letters from SIFMA, Fenwick, NIRI, and General Motors.
    \260\ See letters from SIFMA, Fenwick, and General Motors.
    \261\ See letters from E&Y and Deloitte.
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    Given the increasing length of risk factor disclosure and after 
considering the comments received, we propose to amend Item 105 to 
require summary risk factor disclosure if the risk factor section 
exceeds 15 pages.\262\ Lengthy risk factor disclosure and the inclusion 
of many general risks add to the complexity of disclosure documents, 
without necessarily providing additional meaningful information to 
investors. When registrants provide risk disclosure that exceeds 15 
pages, we propose to require registrants to provide summary risk factor 
disclosure in the forepart of the prospectus or annual report, as 
applicable, under an appropriately captioned heading. The summary would 
consist of a series of short, concise, bulleted or numbered statements 
summarizing the principal factors that make an investment in the 
registrant or offering speculative or risky. The proposed 15-page 
threshold may provide registrants with an incentive to limit the length 
of their risk factor disclosure. We estimate that a 15-page threshold 
would affect approximately 40 percent of current filers.\263\ If 
registrants determine that it is appropriate to provide risk factor 
disclosure that exceeds 15 pages, summary risk factor disclosure 
highlighted in the forepart of the document should enhance the 
readability and usefulness of this disclosure for investors. We believe 
that this approach would appropriately balance the need to provide more 
focused disclosure about a registrant's risk profile with the concerns 
raised by commenters about imposing page limits on risk factor 
disclosure.
---------------------------------------------------------------------------

    \262\ Commission staff reviewed a representative sample of 
filings to help determine the proposed threshold. See infra Section 
IV, note 314.
    \263\ See infra Section IV.B.2.
---------------------------------------------------------------------------

2. Replace the Requirement To Disclose the ``Most Significant'' Factors 
With the ``Material'' Factors
    Since the Commission first published guidance on risk factor 
disclosure in 1964,\264\ 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.\265\ 
Notwithstanding this additional guidance, the length of risk factor 
disclosure and the number of risks disclosed has increased in recent 
years.\266\
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    \264\ See Guides for Preparation and Filing of Registration 
Statements, Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 
1964)] (``1964 Guides'').
    \265\ ``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.
    \266\ See supra notes 250 and 251 and accompanying text.
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    We are proposing to update Item 105 to replace the requirement to 
discuss the ``most significant'' risks with ``material'' risks. 
Securities Act Rule 405 defines ``material'' as follows:

    The term material, when used to qualify a requirement for the 
furnishing of information as to any subject, limits the information 
required to those matters to which there is a substantial likelihood 
that a reasonable investor would attach importance in determining 
whether to purchase the security.\267\
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    \267\ 17 CFR 230.405. Exchange Act Rule 12b-2 defines 
materiality similarly: ``The term `material,' when used to qualify a 
requirement for the furnishing of information as to any subject, 
limits the information required to those matters to which there is a 
substantial likelihood that a reasonable investor would attach 
importance in determining whether to buy or sell the securities 
registered.'' 12 CFR 240.12b-2 (emphasis added).

    We propose revising the standard for disclosure from the ``most 
significant'' risks to ``material'' risks to focus registrants on 
disclosing the risks to which reasonable investors would attach 
importance in making investment decisions. We believe that this 
approach could result in risk factor disclosure that is more tailored 
to the particular facts and circumstances of each registrant, which 
would reduce the amount of risk factor disclosure that is not material 
and potentially shorten the length of the risk factor discussion, to 
the benefit of both investors and registrants.\268\
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    \268\ For a discussion of the potential economic effects of 
switching from a ``most significant'' risks to a ``material risks'' 
disclosure standard, including the possibility that the change could 
result in either more or less expansive disclosure, see infra 
Section IV.B.2.iv.
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3. Require Registrants To Organize Risk Factors Under Relevant Headings
    Since 1964, the Commission has periodically emphasized the 
importance of organized and concise risk factor disclosure.\269\ The 
Concept Release solicited feedback on the ways in which we could 
improve the organization of registrants' risk factor disclosure to help 
investors better navigate the disclosure.\270\ Several commenters 
supported grouping similar risks together,\271\ with one commenter 
noting that the current organizational structure, and not the length, 
of risk factor disclosure, should be the primary concern.\272\ As 
stated above, some commenters noted that registrants often provide 
headings before each specific risk factor, which act as a summary.\273\ 
Further, one commenter noted that the grouping of related risk factors 
together under subheadings for clarity is a best practice currently 
used by many registrants as risk factors have lengthened.\274\
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    \269\ See 1964 Guides, supra note 264; 1982 Integrated 
Disclosure Adopting Release, supra note 9; and Securities Offering 
Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 
2005)].
    \270\ See Concept Release, supra note 6.
    \271\ See letters from PNC, Fenwick, and Wilson Sonsini.
    \272\ See letter from Wilson Sonsini.
    \273\ See letters from SIFMA, Fenwick, and General Motors.
    \274\ See letter from Fenwick.
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    The Concept Release also solicited comment on whether generic risk 
factors are important to investors and if not, how to discourage this 
disclosure.\275\ As noted above, several commenters discussed the 
importance of including both specific and generic risk 
disclosures.\276\ One of these commenters supported revising the 
current text of Item 105 to eliminate the proscription against 
including ``risks that could apply to any issuer or offering.'' \277\ 
In contrast, many commenters opposed inclusion of generic risk 
factors.\278\
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    \275\ See Concept Release, supra note 6.
    \276\ See letters from E&Y, Maryland Bar Securities Committee, 
and CalPERS (refuting the notion that generic and boilerplate risk 
factors cannot impart material information); see also letter from 
NYSSCPA (stating that generic and boilerplate risk factors should be 
included if critical to the overall understanding of a registrant's 
business environment).
    \277\ See letter from E&Y.
    \278\ See letters from EEI and AGA, Investment Program 
Association (July 21, 2016), NAREIT, Better Markets (July 21, 2016), 
Davis, Fenwick, Reardon, NIRI, Financial Services Roundtable, 
Shearman and A. Radin.
---------------------------------------------------------------------------

    We are proposing to require registrants to organize their risk 
factor disclosure under relevant headings in an effort to help readers 
comprehend lengthy risk factor disclosures. As noted above, many 
registrants already do this and we believe that further organization 
within risk factor disclosure will improve the effectiveness of the 
disclosures. In addition, if a registrant chooses to disclose a risk 
that could apply to other companies or securities offerings and the 
disclosure does not provide an explanation of why the identified risk 
is specifically relevant to an investor in its securities, we are 
proposing to require the registrant to disclose such risk factors at 
the end of the risk factor section under the caption ``General Risk 
Factors.''
Request for Comment
    35. Would our proposed approach to Item 105 result in improved risk 
factor disclosure for investors?
    36. Would our proposal to require summary risk factor disclosure if 
the

[[Page 44377]]

risk factor discussion exceeds 15 pages result in improved risk factor 
disclosure for investors?
    37. Is 15 pages an appropriate number of pages to trigger summary 
risk factor disclosure? If not, what is the appropriate page limit that 
should trigger summary risk factor disclosure? Is there a better 
alternative than a page limit to trigger summary risk factor disclosure 
(e.g., should we consider a word limit instead)?
    38. If summary risk factor disclosure is triggered, should we 
require the summary to consist of a series of short, concise, bulleted 
or numbered statements summarizing the principal factors that make an 
investment in the registrant or offering speculative or risky, as 
proposed? Should we in addition or instead limit the length of the 
summary disclosure (e.g., no more than one page)? Should we require the 
bulleted or numbered statements summarizing the risk factors to also 
include hyperlinks to each of the risk factors summarized?
    39. If the risk factors discussion exceeds 15 pages, should we 
require a registrant to include only those risk factors that pose the 
greatest risk to the registrant in the first 15 pages instead of 
requiring it to prepare a risk factor summary?
    40. Should we specify that registrants should present summary risk 
factor disclosure in the forepart of the prospectus or annual report, 
as proposed? Alternatively, should the summary immediately precede the 
full discussion of risk factors? Currently, when the risk factor 
discussion is included in a registration statement, it must immediately 
follow the summary section. Should registrants be permitted to provide 
the full discussion of risk factors elsewhere in the document to 
enhance readability when a summary section is included?
    41. Would changing the standard from the requirement to discuss the 
``most significant'' factors to the ``material'' factors, as proposed, 
result in more tailored disclosure and reduce the length of the risk 
factor disclosure? Would changing the standard, as proposed, result in 
other consequences that we have not considered? If so, provide specific 
examples of such consequences.
    42. Would our proposal that registrants organize their risk factors 
under relevant headings improve disclosures for investors?
    43. Should we require registrants to prioritize the order in which 
they discuss their risk factors so that the risk factors that pose the 
greatest risk to the registrant are discussed first? Would this improve 
disclosures for investors or be unduly burdensome for registrants?
    44. If the registrant discloses generic risk factors, should the 
registrant be required to disclose them at the end of the risk factor 
section, and caption them as General Risk Factors, as proposed?
    45. Should we require registrants to explain how generic, 
boilerplate risk factors are material to their investors, and what, if 
anything, management does to address these risks?
    46. Foreign private issuers that file their Exchange Act annual 
reports on Form 20-F must provide risk factor disclosure as required by 
that Form whereas foreign private issuers that file registration 
statements on Forms F-1, F-3, and F-4 must provide risk factor 
disclosure pursuant to Item 105. Currently Form 20-F does not require a 
summary of the risk factors if the risk factor disclosure exceeds a 
certain page limit, does not state that material risks should be 
disclosed, and does not require the presentation of risk factors, 
including generic risk factors, under appropriate headings. Should we 
amend Form 20-F to include any or all of the proposed risk factor 
disclosure provisions under Item 105? If we do not similarly amend risk 
factor disclosure under Form 20-F, would having one set of risk factor 
disclosure requirements for Form 20-F annual reports and another set 
for registration statements on Forms F-1, F-3, and F-4 cause confusion 
for registrants or investors?
    47. How might we further improve risk factor disclosure?

III. General Request for Comments

    We request and encourage any interested person to submit comments 
on any aspect of our proposals, other matters that might have an impact 
on the proposed amendments, and any suggestions for additional changes. 
With respect to any comments, we note that they are of greatest 
assistance to our rulemaking initiative if accompanied by supporting 
data and analysis of the issues addressed in those comments and by 
alternatives to our proposals where appropriate.

IV. Economic Analysis

    This section analyzes the expected economic effects of the proposed 
amendments relative to the current baseline, which consists of both the 
regulatory framework of disclosure requirements in existence today and 
the current use of such disclosure by investors. As discussed above, we 
propose amendments to modernize and simplify the description of 
business (Item 101), legal proceedings (Item 103), and risk factor 
(Item 105) disclosure requirements in Regulation S-K.\279\ An important 
objective of the proposed amendments is to revise Items 101(a), 101(c), 
and 105 to be more principles-based. Overall, investors and registrants 
may benefit from the proposed principles-based approach if the existing 
prescriptive requirements result in disclosure that is not material to 
an investment decision and is costly to provide. We acknowledge the 
risk that emphasizing a principles-based approach and granting 
registrants more flexibility to determine what and how much disclosure 
about a topic to provide may result in the elimination of some 
information to investors. However, we believe that any such loss of 
information would be limited given that, under the proposed principles-
based approach, registrants still would be required to provide 
disclosure about these topics if they are material to the business.
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    \279\ While Items 101, 103 and 105 have not undergone 
significant revisions in over thirty years, many characteristics of 
the registrants have changed substantially over this time period. 
For example, in 1988, the largest 500 U.S. companies in Standard & 
Poor's Compustat database had an average market capitalization of 
$4.27 billion, foreign income of $281 million, and ratio of 
intangible assets to market capitalization of 8.44%. The largest 100 
companies had an average market capitalization of $12.25 billion, 
foreign income of $730 million, and ratio of intangible assets to 
market capitalization of 7.07%. In 2018, the largest 500 companies 
had an average market capitalization of $49.10 billion, foreign 
income of $1.70 billion, and ratio of intangible assets to market 
capitalization of 29.70%. The largest 100 companies had an average 
market capitalization of $ 141.46 billion, foreign income of $5.18 
billion, and ratio of intangible assets to market capitalization of 
32.62%. There is also significant turnover among the largest 
companies: approximately 34% of top 50 companies in 1988 were still 
in the top 50 companies on 2018. We believe that certain of the 
proposed amendments (the disclosure of the material effects of 
compliance with material government regulations, including foreign 
government regulations) would provide investors with information 
consistent with the changing nature of the registrants.
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    We are sensitive to the costs and benefits of these amendments. The 
discussion below addresses the potential economic effects of the 
proposed amendments, including the likely benefits and costs, as well 
as the likely effects on efficiency, competition, and capital 
formation.\280\ At the outset,

[[Page 44378]]

we note that, where possible, we have attempted to quantify the 
benefits, costs, and effects on efficiency, competition, and capital 
formation expected to result from the proposed amendments. In many 
cases, however, we are unable to quantify the economic effects because 
we lack information necessary to provide a reasonable estimate. For 
example, we are unable to quantify, with precision, the costs to 
investors of utilizing alternative information sources under each 
disclosure item and the potential information processing cost savings 
that may arise from the elimination of disclosures not material to an 
investment decision.
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    \280\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and 
Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] require the 
Commission, when engaging in rulemaking where it is required to 
consider or determine whether an action is necessary or appropriate 
in the public interest, to consider, in addition to the protection 
of investors, whether the action will promote efficiency, 
competition, and capital formation. Further, Section 23(a)(2) of the 
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when 
making rules under the Exchange Act, to consider the impact that the 
rules would have on competition, and prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.
---------------------------------------------------------------------------

A. Baseline and Affected Parties

    Our baseline includes the current disclosure requirements under 
Items 101, 103, and 105 of Regulation S-K, which apply to registration 
statements, periodic reports, and certain proxy statements filed with 
the Commission. Thus, the parties that are likely to be affected by the 
proposed amendments include investors and other users of registration 
statements and periodic reports, and proxy statements, such as 
financial analysts, as well as registrants subject to Regulation S-K.
    The proposed amendments affect both domestic issuers and foreign 
private issuers \281\ that file on domestic forms \282\ and foreign 
private issuers that file on foreign forms.\283\ We estimate that 
approximately 6,919 registrants filing on domestic forms \284\ and 393 
foreign private issuers filing on foreign forms would be affected by 
the proposed amendments. Among the registrants that file on domestic 
forms, approximately 29 percent are large accelerated filers, 19 
percent are accelerated filers, 19 percent are non-accelerated filers, 
and 33 percent are smaller reporting companies. In addition, we 
estimate that approximately 21.3 percent of domestic issuers are 
emerging growth companies.\285\
---------------------------------------------------------------------------

    \281\ See supra note 24 for the definition of foreign private 
issuer.
    \282\ The number of issuers that file on domestic forms is 
estimated as the number of unique issuers, identified by Central 
Index Key (CIK), that filed Forms 10-K and 10-Q, or an amendment 
thereto, with the Commission during calendar year 2018. We believe 
that these filers are representative of the registrants that would 
primarily be affected by the proposed amendments. For purposes of 
this economic analysis, these estimates do not include issuers that 
filed only initial domestic Securities Act registration statements 
during calendar year 2018, and no Exchange Act reports, in order to 
avoid including entities, such as certain co-registrants of debt 
securities, which may not have independent reporting obligations and 
therefore would not be affected by the proposed amendments. 
Nevertheless, the proposed amendments would affect any registrant 
that files a Securities Act registration statement and assumes 
Exchange Act reporting obligations. We believe that most registrants 
that have filed a Securities Act registration statement, other than 
the co-registrants described above, would be captured by this 
estimate through their Form 10-K and Form 10-Q filings. The 
estimates for the percentages of smaller reporting companies, 
accelerated filers, large accelerated filers, and non-accelerated 
filers are based on data obtained by Commission staff using a 
computer program that analyzes SEC filings, with supplemental data 
from Ives Group Audit Analytics.
    \283\ The number of affected issuers that file foreign forms is 
estimated as the number of unique companies, identified by Central 
Index Key (CIK), that filed Forms F-1, F-3, and F-4, or an amendment 
thereto with the Commission during calendar year 2018. See also 
supra note 24.
    \284\ This number includes fewer than 25 foreign issuers that 
file on domestic forms and approximately 100 business development 
companies.
    \285\ An ``emerging growth company'' is defined as an issuer 
that had total annual gross revenues of less than $1.07 billion 
during its most recently completed fiscal year. See 17 CFR 230.405 
and 17 CFR 240.12b-2. See Rule 405; Rule 12b-2; 15 U.S.C. 
77b(a)(19); 15 U.S.C. 78c(a)(80); and Inflation Adjustments and 
Other Technical Amendments under Titles I and II of the JOBS Act, 
Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)]. 
We based the estimate of the percentage of emerging growth companies 
on whether a registrant claimed emerging growth company status, as 
derived from Ives Group Audit Analytics data.
---------------------------------------------------------------------------

B. Potential Costs and Benefits

    In this section, we discuss the anticipated economic benefits and 
costs of the proposed amendments. We first analyze the overall economic 
effects of shifting toward a more principles-based approach to 
disclosure, which is one of the main objectives of the proposed 
amendments. We then discuss the potential costs and benefits of 
specific proposed amendments.
1. Principles-Based Versus Prescriptive Requirements
    Prescriptive requirements employ bright-line, quantitative 
thresholds to identify when disclosure is required, or require 
registrants to disclose the same types of information. Principles-based 
requirements, on the other hand, provide registrants with the 
flexibility to determine (i) whether certain information is material, 
and (ii) how to disclose such information.
    In this release, we propose to revise Items 101(a), 101(c), and 105 
to be more principles-based.\286\ Principles-based requirements may 
result in more or less detail than prescriptive requirements, which set 
forth explicit criteria for disclosure. The economic effects of 
replacing a prescriptive requirement with a more principles-based 
disclosure standard based on materiality depend on a variety of 
factors, including the preferences of investors, the compliance costs 
of producing the disclosure and the nature of the information to be 
disclosed.
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    \286\ Although Items 101(c) and Item 105 use a principles-based 
approach, based on comments received on prior initiatives, it 
appears that some registrants may view these items as imposing 
prescriptive requirements. See supra Sections II.B and II.D. 
Therefore, we are proposing amendments to emphasize the principles-
based approach of these items.
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    For certain existing disclosure requirements, shifting to a more 
principles-based approach could benefit issuers with no loss of 
investor protection because the current requirements occasionally 
result in some disclosure that is immaterial to an investment decision 
and costly for issuers to provide. Elimination of disclosure that is 
not material could reduce compliance burdens and potentially benefit 
investors, to the extent it improves the readability and conciseness of 
the information provided.\287\ In addition, a principles-based approach 
may permit or encourage registrants to present more tailored 
information, which also may benefit investors.\288\
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    \287\ See A. Lawrence, Individual Investors and Financial 
Disclosure, 56 J. Acct. & Econ., 130-147 (2013). Using data on 
trades and portfolio positions of 78,000 households, this article 
shows that individuals invest more in firms with clear and concise 
financial disclosures. This relation is reduced for high frequency 
trading, financially-literate, and speculative individual investors. 
The article also shows that individuals' returns increase with 
clearer and more concise disclosures, implying such disclosures 
reduce individuals' relative information disadvantage. A one 
standard deviation increase in disclosure readability and 
conciseness corresponds to return increases of 91 and 58 basis 
points, respectively. The article acknowledges that, given the 
changes in financial disclosure standards and the possible advances 
in individual investor sophistication, the extent to which these 
findings, which are based on historical data from the 1990s, would 
differ from those today is unknown. Recent advances in information 
processing technology, such as machine learning for textual 
analysis, may also affect the generalizability of these findings.
    \288\ A number of academic studies have explored the use of 
prescriptive thresholds and materiality criteria. Many of these 
papers highlight a preference for principles-based materiality 
criteria. See, e.g. Eugene A. Imhoff Jr. and Jacob K. Thomas, 
Economic consequences of accounting standards: The lease disclosure 
rule change, 10.4 J. Acct. & Econ. 277-310 (1988) (providing 
evidence that management modifies existing lease agreements to avoid 
crossing rules-based criteria for lease capitalization); Cheri L. 
Reither, What are the best and the worst accounting standards?, 12.3 
Acct. Horizons 283 (1998) (documenting that due to the widespread 
abuse of bright-lines in rules for lease capitalization, SFAS No. 13 
was voted the least favorite FASB standard by a group of accounting 
academics, regulators, and practitioners); Christopher P. Agoglia, 
Timothy S. Doupnik, and George T. Tsakumis. Principles-based versus 
rules-based accounting standards: The influence of standard 
precision and audit committee strength on financial reporting 
decisions, 86.3 The Acct. Rev. 747-767 (2011) (conducting 
experiments in which experienced financial statement preparers are 
placed in a lease classification decision context and finding that 
preparers applying principles-based accounting are less likely to 
make aggressive reporting decisions than preparers applying a more 
precise rules-based standard and supporting the notion that a move 
toward principles-based accounting could result in better financial 
reporting); Usha Rodrigues and Mike Stegemoller, An inconsistency in 
SEC disclosure requirements? The case of the ``insignificant'' 
private target, 13.2-3 J. Corp. Fin. 251-269 (2007) (providing 
evidence, in the context of mergers and acquisitions, where rule-
based thresholds deviate from investor preferences). Papers that 
highlight a preference for rules-based materiality criteria are 
cited below.

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[[Page 44379]]

    On the other hand, shifting to a more principles-based approach may 
result in the elimination of disclosure material to an investment 
decision if issuers misjudge what information is material.\289\ To the 
extent that prescriptive requirements result in more complete 
disclosures, such requirements could benefit investors by reducing 
information asymmetry. Reducing information asymmetry may also benefit 
registrants by improving stock market liquidity and decreasing cost of 
capital.\290\ Further, prescriptive standards could enhance the 
comparability and verifiability of information.\291\ We acknowledge, 
however that differences between principles-based standards and 
prescriptive standards have been studied in the accounting context. 
These differences may be narrower in the context of the proposed 
amendments due to the qualitative nature of the disclosures in Items 
101(a), 101(c), and 105. Prescriptive requirements also may be easier 
to apply, saving registrants the costs associated with materiality 
assessments.
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    \289\ The presence of other controls, including accounting 
controls, likely reduces the risk that issuers will misjudge what 
information is material.
    \290\ See, e.g., C. Leuz and P. Wysocki, The Economics of 
Disclosure and Financial Reporting Regulation: Evidence and 
Suggestions for Future Research, 54.2 Journal of Accounting Research 
525-622 (2016) (surveying the empirical literature on the economic 
consequences of disclosure and discussing potential 
capital[hyphen]market benefits from disclosure and reporting, such 
as improved market liquidity and decreased cost of capital).
    \291\ See Mark W. Nelson, Behavioral evidence on the effects of 
principles-and rules-based standards, 17.1 Accounting Horizons 91-
104 (2003); and Katherine Schipper, Principles-based accounting 
standards, 17.1 Accounting Horizons 61-72 (2003) (noting potential 
advantages of rules-based accounting standards, including: Increased 
comparability among firms, increased verifiability for auditors, and 
reduced litigation for firms). See also Randall Rentfro and Karen 
Hooks, The effect of professional judgment on financial reporting 
comparability, 1 Journal of Accounting and Finance Research 87-98 
(2004) (finding that comparability in financial reporting may be 
reduced under principles-based standards, which rely more heavily on 
the exercise of professional judgment but comparability may improve 
as financial statement preparers become more experienced and hold 
higher organizational rank); Andrew A. Acito, Jeffrey J. Burks, and 
W. Bruce Johnson, The Materiality of Accounting Errors: Evidence 
from SEC Comment Letters, 36.2 Contemp. Acct. Res. 839, 862 (2019) 
(studying managers' responses to SEC inquiries about the materiality 
of accounting errors and finding that managers are inconsistent in 
their application of certain qualitative considerations and may omit 
certain qualitative considerations from their analysis that weigh in 
favor of an error's materiality).
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    Some of the costs of shifting to a more principles-based approach 
could be mitigated by external disciplines, such as the Commission 
staff's filing review program. In addition, registrants would remain 
subject to the antifraud provisions of the securities laws.\292\ There 
also may be incentives for registrants to voluntarily disclose 
additional information if the benefits of reduced information asymmetry 
exceed the disclosure costs.
---------------------------------------------------------------------------

    \292\ See, e.g., Exchange Act Rule 10b-5(b) [17 CFR 240.10b-
5(b)].
---------------------------------------------------------------------------

    Differences between the principles-based and prescriptive 
approaches are likely to vary across registrants, investors, and 
disclosure topics. Despite potential costs associated with materiality 
assessments, replacing prescriptive requirements with principles-based 
requirements is likely to reduce compliance costs because registrants 
would have the flexibility to determine whether certain information is 
material under the principles-based approach. To the extent the 
principles-based approach reduces compliance costs, the cost reduction 
should be more beneficial to smaller registrants that are financially 
constrained. Although eliminating information that is not material 
should benefit all investors, it could benefit retail investors more 
since they are less likely to have the time and resources to devote to 
reviewing and evaluating disclosure. At the same time, smaller 
registrants with less established reporting histories may be the most 
at risk of persistent information asymmetries if the principles-based 
approach results in loss of information material to investors. In the 
event of loss of material information (the risk of which, as noted 
above, is offset by mitigants including accounting controls and the 
antifraud provisions of the securities laws), retail investors in these 
registrants may be more affected than institutional investors because 
obtaining information from alternative sources could involve monetary 
costs, such as database subscriptions, or opportunity costs, such as 
time spent searching for alternative sources, and these costs may fall 
more heavily on retail investors than on institutional investors.
    Across different disclosure topics, the principles-based approach 
may be more appropriate for topics where the relevant information tends 
to vary greatly across companies because, in these situations, the more 
standardized prescriptive requirements are less likely to elicit 
information that is tailored to a specific company. A principles-based 
approach may also be more appropriate for disclosures that are episodic 
in nature since investors may derive relatively less value from 
comparisons of such disclosure for a given registrant over time. In 
addition, registrants may derive relatively less benefit from applying 
a standardized prescriptive approach to episodic disclosures, which may 
be less amenable to routinized reporting than periodic disclosures of 
information that arise on a regular basis.
2. Benefits and Costs of Specific Proposed Amendments
    We expect the proposed amendments would result in costs and 
benefits to registrants and investors, and we discuss those costs and 
benefits qualitatively, item by item, in this section. The proposed 
changes to each item would impact the compliance burden for registrants 
in filing particular forms. Overall, we expect the net effect of the 
proposed amendments on a registrant's compliance burden to be limited. 
The quantitative estimates of changes in those burdens for purposes of 
the Paperwork Reduction Act are further discussed in Section V. As 
explained in the item-by-item discussion of the proposed amendments in 
this section, we expect certain aspects of the proposed amendments to 
increase compliance burdens, while others are expected to decrease the 
burdens. Taken together, we estimate that the proposed amendments are 
likely to result in a net decrease of between three and five burden 
hours per form for purposes of the Paperwork Reduction Act.\293\
---------------------------------------------------------------------------

    \293\ See infra Section V.B.
---------------------------------------------------------------------------

i. General Development of Business (Item 101(a))
    Item 101(a) requires a description of the general development of 
the registrant's business, such as the year in which the registrant was 
organized and the nature and results of any merger of the registrant or 
its significant subsidiaries. Some academic research has found that 
information required under Item 101(a) is relevant to firm value. For 
example, the registrant's age can predict its growth rates \294\ and

[[Page 44380]]

corporate innovation.\295\ Merger activities can affect shareholder 
value and predict future performance.\296\ Given the relevance of such 
information to firm value, and thus investors, the effects of the 
proposed amendments to Item 101(a) on investors would depend on whether 
they result in more concise \297\ and material disclosures of business 
development information under Item 101(a).
---------------------------------------------------------------------------

    \294\ See David S. Evans, The Relationship between Firm Growth, 
Size, and Age: Estimates for 100 Manufacturing Industries, 35 J. 
Indus. Econ. 567-81 (1987) (finding that firm growth decreases with 
both firm size and age). See also C. Arkolakis, T. Papageorgiou, and 
O. A. Timoshenko, Firm Learning and Growth, 27 Rev. Econ. Dyn. 146-
168 (2018) (developing a theoretical model showing that firm growth 
rates decrease with firm age and calibrating the model using plant-
level data).
    \295\ See Elena Huergo and Jordi Jaumandreu, How Does 
Probability of Innovation Change with Firm Age?, 22 Small Bus. Econ. 
193-207 (2004) (finding that, as a firm's age increases, the 
innovation rate diminishes and attributing this finding to the rapid 
innovation necessary for a firm to compete when entering a market); 
A. Coad, A. Segarra, and M. Teruel, Innovation and Firm Growth: Does 
Firm Age Play a Role?, 45 Res. Policy 387-400 (2016) (finding that 
young firms undertake riskier innovation and receive larger benefits 
from R&D).
    \296\ See Sara B. Moeller, Frederik P. Schlingemann, and Rene M. 
Stulz, Wealth Destruction on a Massive Scale? A Study of Acquiring-
Firm Returns in the Recent Merger Wave, 60 J. Fin. 757-82 (2005) 
(finding that, although small gains were made in the 1980s, 
investors experienced negative gains from 1998 to 2001, and firms 
that announce acquisitions with large dollar losses performed poorly 
afterwards). See also Ran Duchin and Breno Schmidt, Riding the 
Merger Wave: Uncertainty, Reduced Monitoring, and Bad Acquisitions, 
107 J. Fin. Econ. 69-88 (2013) (finding that the average long-term 
performance of acquisitions initiated during merger waves is 
significantly worse than those initiated off the waves).
    \297\ Investors may benefit from more concise disclosure that 
facilitates their ability to focus on information material to an 
investment decision. See supra note 286 for details.
---------------------------------------------------------------------------

    We propose to revise the requirements in Item 101(a) to be more 
principles based, requiring disclosure of information material to an 
understanding of the general development of the registrant's business. 
The shift to a more principles-based approach for these requirements 
would give rise to the potential economic effects discussed in Section 
IV.B.1 above.
    Currently, Item 101(a) requires registrants to describe their 
business development during the past five years, or such shorter period 
as the registrant may have engaged in business. We propose to eliminate 
the prescribed five-year timeframe for this disclosure. Eliminating 
this specific requirement would provide registrants with flexibility to 
choose a different timeframe that is more relevant in describing their 
business development to investors. For example, a long timeframe might 
be less appropriate for registrants operating in rapidly changing 
environments where historical information becomes irrelevant in a short 
period of time. Given that registrants have the flexibility to 
determine the appropriate timeframe, this proposed amendment is likely 
to reduce compliance costs. Investors may also benefit if the timeframe 
chosen by the registrants is more consistent with their preferences 
than the prescribed five-year timeframe, but may be harmed if the 
timeframe chosen by the registrants is less consistent with their 
preferences than the prescribed five-year timeframe.
    Currently, Item 101(a) requires registrants to describe their 
business development in registration statements and annual reports. For 
filings subsequent to the initial registration statement, we propose 
revising Item 101(a)(1) to require only an update of this disclosure 
with an active hyperlink to the registrant's most recently filed 
disclosure that, together with the update, would present a complete 
discussion of the general development of its business.\298\ If 
duplicative disclosure distracts investors from other important 
information, the proposal may benefit investors by highlighting 
material developments in the reporting period. However, to the extent 
that historical information would be available through hyperlinking as 
opposed to being in the same filing, investors would have to spend more 
time to retrieve the information from another disclosure document. 
Because the proposed provisions would involve the use of only one 
hyperlink, we believe the increase in retrieval costs for investors 
would be minimal. While registrants may incur minimal compliance costs 
to include hyperlinks, we believe registrants would benefit from the 
proposal due to the reduction in costs to disclose duplicative 
information.
---------------------------------------------------------------------------

    \298\ A registrant would be required to incorporate by reference 
the earlier disclosure into the updated filing. See supra Section 
II.A.2. We are also proposing 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 proposed Item 
101(a)(2), including the proposed hyperlink requirement.
---------------------------------------------------------------------------

    We propose to amend Item 101(a) to provide a non-exclusive list of 
topics that should be disclosed if material. Providing potential 
disclosure topics should clarify the requirements and avoid potential 
confusion among registrants. Besides items currently required under 
Item 101(a), the proposed topics also include material changes to a 
registrant's previously disclosed business strategy, which is not 
currently required to be disclosed. Since several studies have found 
that business strategy is a critical determinant of corporate success 
\299\ and an essential component of business model design,\300\ 
investors may benefit from any increase in the disclosure of material 
changes to previously disclosed business strategies. Since we are not 
proposing to make the disclosure of business strategy mandatory if a 
registrant has not previously disclosed its business strategy, the 
costs of revealing proprietary information that could be harmful to 
registrants' competitive positions should be somewhat limited.
---------------------------------------------------------------------------

    \299\ See Jay B. Barney, Strategic Factor Markets: Expectations, 
Luck, and Business Strategy 32 Mgmt. Sci. 1231-41 (1986) (suggesting 
that strategies focusing on creating imperfectly competitive product 
markets may not generate superior performance if the cost of 
implementing such strategies is high, and that strategic choices 
should flow mainly from the analysis of its antecedent unique skills 
and capabilities, rather than from the analysis of its competitive 
environment). See also T. Ritter and H. G. Gemunden, The Impact Of A 
Company's Business Strategy on Its Technological Competence, Network 
Competence and Innovation Success, 57(5) J. Bus. Res. 548-556 (2004) 
(finding that a company's innovation success is positively 
correlated with the strength of its technology-oriented business 
strategy).
    \300\ See David J. Teece, Business Models, Business Strategy and 
Innovation, 43 Long Range Plan. 172-94 (2009) (examining the 
significance of business models and explorings their connections 
with business strategy, innovation management, and economic theory). 
See also P. Spieth, D. Schneckenberg, K. Matzler, Exploring the 
Linkage between Business Model (&) Innovation and the Strategy of 
the Firm, 46 R&D Mgmt. 403-413 (2016) (examining firm strategy-
business model linkage and exploring the role of business model 
innovation as analytic perspective for identifying sources of firm 
performance).
---------------------------------------------------------------------------

    Overall, investors and registrants may benefit from the proposed 
amendments to Item 101(a) if the existing requirements elicit 
disclosure that is not material to an investment decision and/or is 
more costly to provide. However, granting registrants additional 
flexibility to determine (i) whether certain information is material, 
and (ii) how to disclose such information may result in the elimination 
of information in cases in which issuers stop disclosing information 
material to an investment decision.
ii. Narrative Description of Business (Item 101(c))
    Item 101(c) requires a narrative description of the registrant's 
business. The current requirement identifies twelve specific items that 
must be disclosed to the extent material to an understanding of the 
registrant's business taken as a whole. We propose to revise the 
requirements in Item 101(c) to be more clearly principles based. The 
proposed amendments would require a description of the business and 
would set forth seven non-exclusive examples of information to be 
disclosed if material to an understanding of the

[[Page 44381]]

business. These examples include some, but not all, of the topics 
currently required under Item 101(c) as well as some additional topics. 
Emphasizing a principles-based approach to Item 101(c) would give rise 
to the potential economic effects discussed in Section I.B.1 above. In 
addition, eliminating prescriptive requirements for certain items, such 
as the number of employees, may diminish comparability across firms.
    The topics that would be retained as examples under the proposed 
amendments are: (1) Principal products produced and services rendered, 
and dependence on certain customers; (2) new products and competitive 
conditions; (3) sources and availability of raw materials and 
intellectual property; (4) business subject to renegotiation or 
termination of government contracts; (5) seasonality of the business; 
and (6) the material effects of compliance with environmental 
laws.\301\ Since the information required under Item 101(c) may be 
relevant to firm value,\302\ investors and registrants would likely 
benefit if the proposed examples elicit information material to an 
investment decision while allowing registrants to tailor the disclosure 
to their specific circumstances.
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    \301\ The current Item 101(c) requirement to disclose the number 
of a registrant's employees potentially would be encompassed by the 
proposed more expansive human capital resources disclosure topic. 
See supra Section II.B.7.
    \302\ For example, some academic research has found that the 
introduction of a new product increases long-term financial 
performance of the company and firm value. See Dominique Hanssens, 
Koen Pauwels, Jorge Silva-Risso, and Shuba Srinivasan, New Products, 
Sales Promotions, and Firm Value: The Case of the Automobile 
Industry, 68 J. Marketing 142-56 (2004).and Amil Petrin, Quantifying 
the Benefits of New Products: The Case of the Minivan, 110 J. Pol. 
Econ. 705-29 (2002). Some academic research has also found that 
patents have a significant impact on firm-level productivity and 
market value. See Nicholas Bloom and John Van Reenen, Patents, Real 
Options and Firm Performance, 112 Econ. J. C97-C116 (2002), and Zvi 
Griliches, Market Value, R&D and Patents, 7 Econ. Letters 183-87 
(1981).
---------------------------------------------------------------------------

    Two of the proposed topics are more expansive than the current 
disclosure requirements contained in Item 101(c). We propose to replace 
the requirement to disclose the number of employees with a description 
of the registrant's human capital resources, including in such 
description 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. The 
proposed amendment provides non-exclusive examples of human capital 
measures and objectives, such as measures or objectives that address 
the attraction, development, and retention of personnel. In one meta-
analysis, which reviewed 66 studies, the authors found that besides the 
number of employees, other human capital characteristics, including 
education, experience, and training,\303\ have positive effects on firm 
performance. Another author found that turnover rates reflect human 
resource management practices.\304\ Therefore, it is possible that 
investors may benefit from additional information elicited by the human 
capital topic. Registrants would incur incremental compliance costs to 
provide this additional information, if they determine that it is 
material.
---------------------------------------------------------------------------

    \303\ See T. R. Crook, S. Y Todd, J. G. Combs, D. J. Woehr, & D. 
J. Ketchen Jr., Does human capital matter? A meta-analysis of the 
relationship between human capital and firm performance, 96 J. Appl. 
Psychol. 443-56 (2011).
    \304\ See M.A. Huselid, The Impact of Human Resource Management 
Practices on Turnover, Productivity, and Corporate Financial 
Performance, 38 Acad. Manag. J. 635-672 (1995).
---------------------------------------------------------------------------

    We also propose to replace the requirement to disclose the material 
effects on the registrant of compliance with environmental laws with a 
disclosure topic that covers the material effects of compliance with 
material government regulations, including environmental laws. To the 
extent that information about compliance with government regulations 
affects firm value, investors may benefit from additional information 
about the effects of material government regulations. Registrants, 
however, will incur incremental compliance costs to provide this 
information, if they determine that it is material to an understanding 
of their business. To the extent that many registrants already disclose 
such information, the incremental benefits and costs could be limited.
    Some of the disclosure requirements currently contained in Item 
101(c) would not be included as potential topics in the revised 
rule.\305\ To the extent that the exclusion of these items results in a 
loss of material information,\306\ there may be costs to investors. 
However, we believe that any such costs would be limited given that, 
under the proposed principles-based approach, the list of disclosure 
topics is not exhaustive and registrants still would be required to 
provide disclosure about these topics if they are material to an 
understanding of the business.
---------------------------------------------------------------------------

    \305\ The proposed amendments would no longer list the following 
topics: Disclosure about new segments and dollar amount of backlog 
orders believed to be firm, in addition to working capital 
practices, which we discuss below.
    \306\ An academic article shows that acquisition of new segments 
has significant effects on firm productivity. Firms diversifying 
into a new segment experience a net reduction in productivity. While 
productivity of new plants increases, incumbent plants suffer. See 
Antoinette Schoar, The Effect of Diversification on Firm 
Productivity, 62 J. Fin. 2379-2403 (2002). Another article shows 
that backlog orders can predict future earnings. See Siva Rajgopal, 
Terry Shevlin, and Mohan Venkatachalam, Does the Market Fully 
Appreciate the Implications of Leading Indicators for Future 
Earnings? Evidence from Order Backlog, 8 Rev. Acct. Stud. 461-492 
(2003). Based on these studies, one could anticipate that 
availability of material information on new segments and dollar 
amount of backlog orders believed to be firm could benefit 
investors.
---------------------------------------------------------------------------

    Additionally, in an effort to consolidate working capital 
disclosure in one location and to avoid duplicative disclosure, we 
propose not to include working capital practices as a potential topic 
in Item 101(c), with the expectation that working capital would be 
discussed in a registrant's MD&A, to the extent material. If 
duplicative disclosure distracts investors from other important 
information, the proposal may benefit investors by reducing repetition 
and facilitating more efficient information processing. However, to the 
extent that information on working capital practices would no longer be 
readily available in multiple locations, investors may have to spend 
more time to retrieve the information. Registrants may marginally 
benefit from reduced compliance costs from the elimination of 
duplicative disclosure.
    Overall, investors and registrants may benefit from the proposed 
amendments to Item 101(c) if the existing requirements result in 
disclosure that is not material to an investment decision and/or is 
costly to provide.
iii. Legal Proceedings (Item 103)
    Item 103 requires disclosure of material pending legal proceedings 
and other relevant information about the proceedings, such as the name 
of the court, the date instituted, and the principal parties involved. 
Given that involvement in legal proceedings can affect a firm's cash 
flows through multiple channels, including legal fees, the cost of 
executives being distracted from their main operational tasks, 
reputational costs, and settlement costs, information required under 
Item 103 is relevant to firm value. Several studies also have found 
that the possibility of legal proceedings may affect corporate 
decisions, such as pricing of securities \307\ and management's 
information dissemination.\308\

[[Page 44382]]

Therefore, investors might benefit if the proposal to update Item 103 
results in more effective disclosure of material legal proceedings 
information.
---------------------------------------------------------------------------

    \307\ See Michelle Lowry and Susan Shu, Litigation Risk and IPO 
Underpricing, 65 J. Fin. Econ. 309-35 (2002) (finding that firms 
with higher litigation risk underprice their IPOs by a greater 
amount as a form of insurance, and underpricing by a greater amount 
lowers expected litigation costs).
    \308\ See Douglas J. Skinner, Why Firms Voluntarily Disclose Bad 
News?, 32 J. Acct. Res. 38-60 (1994) (suggesting that because 
shareholders are more likely to sue over earnings announcements with 
large negative returns, firms have an incentive to disclose bad 
earnings early in order to reduce the probability of being sued and 
the magnitude of damages). See also Joel F. Houston, Chen Lin, Sibo 
Liu, and Lai Wei, Litigation Risk and Voluntary Disclosure: Evidence 
from Legal Changes, Account. Rev. (forthcoming 2019) (finding a 
positive relation between the expectation of litigation and 
voluntary disclosure and suggesting that earnings forecast 
strategies are often designed to deter litigation).
---------------------------------------------------------------------------

    Currently, Item 103 and U.S. GAAP, which requires disclosure of 
certain loss contingencies, overlap in the requirement to disclose 
certain information associated with legal proceedings. As a result, in 
order to comply with Item 103, registrants commonly repeat disclosures 
that are already provided elsewhere in registration statements and 
periodic reports. We propose to revise Item 103 to encourage the use of 
hyperlinks or cross-references to avoid repetitive disclosure. If 
duplicative disclosure distracts investors from other important 
information, the proposal may benefit investors by reducing repetition 
and facilitating more efficient information processing. However, to the 
extent that some information on legal proceedings would no longer be 
readily available under Item 103, investors may have to spend more time 
to retrieve the information through hyperlinks or cross-references. 
However, we believe the increase in retrieval cost for investors would 
be minimal. While registrants may incur minimal compliance costs if 
they choose to include hyperlinks, we believe registrants would benefit 
from the proposal due to the potential reduction in costs to disclose 
duplicative information.
    Currently, Item 103 specifically requires disclosure of any 
proceedings under environmental laws to which a governmental authority 
is a party unless the registrant reasonably believes that the 
proceeding will result in monetary sanctions, exclusive of interest and 
costs, of less than $100,000. This bright-line threshold for 
environmental proceedings was adopted in 1982. We propose to adjust the 
$100,000 threshold to $300,000 to account for the effects of inflation. 
Some research has found that environmental liabilities can influence 
certain corporate decisions related to managing environmental 
regulatory risk \309\ and that some investors include environmental 
criteria in their investment strategies.\310\ Therefore, the disclosure 
of environmental proceedings at the appropriate level might benefit 
investors who have a particular interest in environmental matters. The 
economic effects of increasing the disclosure threshold depend on 
investor preferences. In other words, if investors do not use 
information about environmental proceedings that result in sanctions 
smaller than $300,000 to inform investment decisions, the proposal may 
benefit investors since elimination of disclosure that investors do not 
use may facilitate more efficient information processing. If investors 
use such information, however, the proposal may have a cost to them. 
Since the proposed threshold is higher than the current threshold, 
registrants should benefit from reduced compliance costs.
---------------------------------------------------------------------------

    \309\ See Dean Neu, Kathryn Pedwell, and Hussein Warsame, 
Managing Public Impressions: Environmental Disclosures in Annual 
Reports, 23 Acct. Org. & Soc'y 265-82 (1998) (using a matched-pair 
sample of publicly traded Canadian companies that have been subject 
to environmental fines and those that have not to analyze changes in 
pre-fine and post-fine environmental disclosure quality, and finding 
that environmental disclosure provides organizations with a method 
of managing potential discrediting events). See also Xin Chang, 
Kangkang Fu, Tao Li, Lewis Tam, and George Wong, Corporate 
Environmental Liabilities and Capital Structure (2018), available at 
https://ssrn.com/abstract=3200991 (documenting that firms with 
higher environmental liabilities maintain lower financial leverage 
ratios and suggesting that environmental liabilities and financial 
liabilities are substitutionary).
    \310\ See Steve Schueth, Socially Responsible Investing in the 
United States, 43 J. Bus. Ethics 189-94 (2003) (providing an 
overview of the concept and practice of socially and environmentally 
responsible investing, describing the investment strategies 
practiced in the U.S., offering explanations for its growth, and 
examining who chooses to invest in a socially and environmentally 
responsible manner). See also Laura Starks, Parth Venkat, and Qifei 
Zhu, Corporate ESG profiles and investor horizons (2017), available 
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049943 
(finding that investors behave more patiently toward 
environmentally-responsible firms as they sell less after negative 
earnings surprises or poor stock returns). However, investors may 
derive value from characteristics of investments that are unrelated 
to financial performance, and these studies do not directly address 
whether environmental disclosures provide material information to 
investors.
---------------------------------------------------------------------------

iv. 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. 
Some academic research supports the notion that information currently 
required under Item 105 is important to investors. For example, there 
is evidence that risk factor disclosure by publicly traded firms is 
material in content.\311\ There also is evidence suggesting that 
investors benefit from risk-factor disclosures that are more 
specific.\312\ In measuring long-run returns to IPO stocks, some 
studies conclude that the returns are commensurate with the risk 
profiles of the individual firms.\313\ Together, this research supports 
the notion that effective disclosures of risk factors can help 
investors better manage their risk exposure.
---------------------------------------------------------------------------

    \311\ See John L. Campbell, Hsinchun Chen, Dan S. Dhaliwal, 
Hsin-min Lu, and Logan B. Steele, The information content of 
mandatory risk factor disclosures in corporate filings, 19 Rev. 
Acct. Stud. 396-455 (2014) (finding that the required disclosures of 
risk factors in Form 10-K filings affect market beta, stock return 
volatility, information asymmetry, and firm value, and that firms 
that face more risks disclose correspondingly more in the risk 
factor discussion).
    \312\ See Ole Kristian Hope, Danqi Hu and Hai Lu, The Benefits 
of Specific Risk-Factor Disclosures, 21 Rev. Acct. Stud. 1005-45 
(2016) (finding that the market reaction to a Form 10-K filing is 
positively and significantly associated with specificity and 
suggesting that analysts are better able to assess fundamental risk 
when firms' risk-factor disclosures are more specific).
    \313\ See Bj[oslash]rn Eckbo and [Oslash]yvind Norli, Liquidity 
Risk, Leverage, and Long-Run IPO Returns, 11. J. Corp. Fin. 1-35 
(2005) (constructing a portfolio of 6,000 IPO stocks and measure 
their returns in order to compare them with individual risk 
factors). The model for risk estimation includes several 
quantitative measures, as well as simple characteristic-based risks 
of the type disclosed in Forms S-1 and 10-K. The results indicate 
that the returns are likely fully justified by the increased risk of 
the IPO firms.
---------------------------------------------------------------------------

    We propose to amend Item 105 to require summary risk factor 
disclosure in the forepart of the document when the risk factor section 
exceeds 15 pages. If lengthy risk factor disclosure contains 
information that is less meaningful to investors, such as generic risks 
that could apply to any investment in securities, a summary of risk 
factors should benefit investors, especially those who have less time 
to review and analyze registrants' disclosure, by enabling them to make 
more efficient investment decisions. The proposed threshold could also 
incentivize registrants to limit the length of their risk factor 
disclosure to 15 pages. Based on current disclosure practices, we 
estimate that a 15-page threshold would affect approximately 40 percent 
of registrants.\314\ In order to comply with

[[Page 44383]]

the proposed amendments, registrants may incur additional costs to 
summarize or shorten their risk factor disclosure. If registrants 
shorten their risk factor disclosure to avoid triggering the summary 
disclosure requirement, the disclosure might become less detailed. 
However, registrants that are providing lengthy risk factor disclosure 
to reduce potential litigation risks might be less likely to shorten 
the disclosure simply to avoid this requirement.
---------------------------------------------------------------------------

    \314\ To estimate the percentage of registrants that would be 
affected by a 15-page threshold, we extracted all Forms S-1, S-3, S-
4, S-11, 1-A, 10, and 10-K filed with the Commission during calendar 
year 2018. This population consists of approximately 10,000 forms. 
We then excluded Forms 10-K filed by smaller reporting companies and 
asset-backed issuers as well as Forms 10 filed by smaller reporting 
companies because they are not required to provide risk factor 
disclosure per Item 1A or Instruction J. Next, we constructed a 
random sample of 100 companies and calculated the length of their 
risk factor disclosure. The resulting page distribution had the mean 
of 15.26 and median of 13.5 pages. The 15-page threshold is around 
the 60th percentile of the distribution. Therefore, we estimate that 
this threshold would affect approximately 40 percent of registrants.
---------------------------------------------------------------------------

    We propose to update Item 105 to replace the requirement to discuss 
the ``most significant'' risks with ``material'' risks. The economic 
effects of the proposal depend on the preferences of investors. If the 
existing ``most significant'' standard elicits too much or too little 
information, investors may benefit from the proposed materiality 
standard. Focusing on the risks to which investors would attach the 
most importance should enable them to make more efficient investment 
decisions. Registrants may experience increased (decreased) compliance 
costs if the materiality standard results in more (less) expansive 
disclosure than the existing ``most significant'' standard.
    We propose to update Item 105 to require registrants to organize 
their risk factor disclosure under relevant headings, with generic risk 
factors, if disclosed, at the end of the section captioned as ``General 
Risk Factors.'' Some academic research has found that different types 
of registrants disclose different types of risk factors and certain 
types of risk factors are more correlated with stock return 
volatilities and systematic risks.\315\ Therefore, well-organized risk 
factor disclosure that gives greater prominence to the most significant 
risks could benefit investors, especially those who have less time to 
review and analyze registrants' disclosure, by enabling them to make 
more efficient investment decisions. Registrants may incur additional 
costs to organize their risk factor disclosure.
---------------------------------------------------------------------------

    \315\ See Ryan D. Israelsen, Tell It Like It Is: Disclosed Risks 
and Factor Portfolios (2014), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2504522 (using textual analysis 
techniques to extract a broad set of disclosed risk factors from 
firms' SEC filings to examines characteristics of the firms most 
likely to make each type of disclosure, and investigating the 
relation between firms' risk disclosures and their stock return 
volatilities and factor loadings).
---------------------------------------------------------------------------

    Overall, the proposed amendments to Item 105 may benefit investors 
if they result in disclosure that is more likely to be material and 
concise. Registrants may incur additional costs to organize and 
summarize their risk factor disclosure. To the extent that registrants 
shorten their risk factor disclosure to avoid triggering the summary 
disclosure requirement and investors valued the additional information, 
investors would incur costs associated with the loss of some 
information.

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

    As discussed above, the proposed amendments may improve capital 
allocation efficiency by enabling investors to make more efficient 
investment decisions. For example, the proposed amendments may reduce 
search costs for certain investors by eliminating information that is 
not material to those investors. Given that certain investors may have 
less time to review and analyze registrants' disclosure,\316\ 
elimination of such information may facilitate more efficient 
investment decision making. In addition, permitting issuers to omit 
disclosure of information when it is not material may reduce issuer 
compliance costs, allowing issuers to deploy resources towards more 
productive uses and thus encouraging capital formation. The reduction 
in compliance costs might be particularly beneficial for smaller and 
younger issuers that are resource-constrained.\317\
---------------------------------------------------------------------------

    \316\ See David Hirshleifer and Siew Hong Teoh, Limited 
attention, information disclosure, and financial reporting, 36 J. 
Acct. & Econ. 337-86 (2003) (developinging a theoretical model where 
investors have limited attention and processing power and showing 
that, with partially attentive investors, the means of presenting 
information may have an impact on stock price reactions, 
misvaluation, long-run abnormal returns, and corporate decisions).
    \317\ We note, however, that, except for the elimination of the 
provision that requires smaller reporting companies to describe the 
development of their business during the last three years, smaller 
reporting companies that elect to provide the alternative business 
disclosure under Item 101(h) will continue to have mostly 
prescriptive requirements under the proposed amendments.
---------------------------------------------------------------------------

    However, in cases in which issuers misjudge what information is 
material, a principles-based disclosure framework relying on issuers' 
determinations could result in increased information asymmetries 
between issuers and investors. Such asymmetries may increase the cost 
of capital, reduce capital formation, and hamper efficient allocation 
of capital across companies. Overall, to the extent that the proposed 
amendments would eliminate disclosure that is not considered to be 
material, we believe these effects would be limited. Moreover, we would 
expect this risk to be offset by mitigants including accounting 
controls and the antifraud provisions of the securities laws.

D. Alternatives

    We are proposing to revise Items 101(a), 101(c), and 105 to be more 
principles-based. As an alternative to this proposal, we considered 
modifying these requirements using prescriptive standards. A 
prescriptive standard could preserve the information investors 
currently receive while eliciting additional specific disclosures, may 
be easier to apply, and could enhance the comparability and 
verifiability of information. For example, in response to previous 
requests for comment, commenters advocated for additional specific 
disclosures about environmental and foreign regulatory risks, the 
number and types of employees, and business strategy. However, not all 
of these disclosures will be relevant at the same level of detail for 
all registrants. Given that the optimal levels of disclosure for 
business description and risk factors, in particular, are likely to 
vary greatly across registrants, a more flexible principles-based 
approach should be more likely to elicit the appropriate disclosures 
for these items. In addition, a prescriptive approach to a particular 
area of disclosure where the specified metric does not capture or does 
not fully capture the information likely to be material to an 
investment decision for a particular issuer or for comparable issuers 
may lead investors to rely on that metric for the issuer or as a 
comparative tool with respect to other issuers.
    We also are proposing to adjust for inflation the bright-line 
threshold for environmental proceedings in Item 103 from $100,000 to 
$300,000. As an alternative to this proposal, we considered applying a 
materiality standard. On the one hand, a materiality standard might 
elicit disclosure that is more relevant to a registrant's operations. 
For example, the same dollar amount of environmental fines might have a 
significant impact on cash flows of a small registrant but a trivial 
impact on cash flows of a large registrant. On the other hand, the 
bright-line threshold is easier to apply and could enhance 
comparability across registrants and over time. Given that some 
environmental proceedings can be factually and legally complex, a 
bright-line threshold provides an easy-to-apply benchmark for 
registrants when determining whether a particular environmental 
proceeding should be disclosed. Another alternative is to adopt a lower 
or higher bright-line threshold than the one proposed. The optimal 
threshold depends on the preference of investors. For example, a

[[Page 44384]]

lower bright-line threshold might be more appropriate if investors use 
information about environmental proceedings smaller than $300,000 to 
inform investment decisions.
    As another alternative, we considered revising Form 20-F so that 
certain of the proposed amendments would also apply to foreign private 
issuers.\318\ For example, we considered making the business disclosure 
requirements under Form 20-F, which are largely prescriptive, more 
principles based as we have proposed to do for domestic registrants. 
One advantage to similarly amending the business disclosure 
requirements under Form 20-F is that it would enable foreign 
registrants to realize the same expected benefits as domestic 
registrants by permitting them to tailor their disclosure to fit their 
own particular circumstances and reduce the amount of disclosure that 
is not material. However, this could reduce the ability of foreign 
private issuers to use a single disclosure document that would be 
accepted in multiple jurisdictions.\319\
---------------------------------------------------------------------------

    \318\ As previously explained, business disclosure for foreign 
private issuer registrants is governed by Part I of Form 20-F, and 
not by Item 101 of Regulation S-K. See supra note 23. The Commission 
amended Form 20-F in 1999 to conform in large part to the non-
financial disclosure standards endorsed by IOSCO. See supra note 190 
and accompanying text.
    \319\ See supra note 191 and accompanying text.
---------------------------------------------------------------------------

    More particularly, similar to our rule proposal for registrants 
filing on domestic forms, we considered amending Form 20-F to include 
as a business disclosure topic human capital resources, including any 
human capital measures or objectives that management focuses on in 
managing the business, to the extent material to an understanding of 
the registrant's business. Such an amendment could impose additional 
costs in the short run for foreign private issuers, to the extent that 
this disclosure is not required in other jurisdictions. At the same 
time, investors could benefit from any additional information elicited 
by the human capital topic.
    We also considered amending Item 101(h), which permits a smaller 
reporting company to provide the disclosure about its business 
development and description of its business pursuant to that Item as an 
alternative to Items 101(a) and (c).\320\ We considered amending the 
disclosure requirements of Item 101(h), which are largely prescriptive, 
to make them more principles-based, similar to the approach proposed 
for Items 101(a) and (c). Such an amendment would enable smaller 
reporting companies to tailor their business disclosure to fit their 
particular circumstances, which could help to eliminate information 
that is not material. Smaller reporting companies with less established 
reporting histories, however, may be the most at risk of persistent 
information asymmetries if the principles-based approach results in 
loss of information material to investors. As noted above, this risk 
would be offset by mitigants including accounting controls and 
antifraud provisions of the securities laws.
---------------------------------------------------------------------------

    \320\ See supra note 80.
---------------------------------------------------------------------------

E. Request for Comments

    In addition to the request for comments in Sections II and III of 
this release, we request comment on various aspects of the costs and 
benefits of our proposed amendments. We request comment from the point 
of view of investors, registrants, and other market participants. We 
are interested in comments on the analyses and conclusions of this 
Section and any effect the proposed amendments may have on efficiency, 
competition, and capital formation. We also request comments on 
alternatives presented in this release as well as any additional 
alternatives to the proposed amendments that should be considered. We 
appreciate any data or analysis that may help quantify the potential 
costs and benefits identified. In particular, we appreciate any data or 
analyses that would help understand the effects of using a higher or 
lower quantitative threshold for environmental proceedings. In 
addition, if the proposed materiality standards in this release 
diminish comparability among registrants, we appreciate any data or 
analyses on the costs associated with the loss of such comparability.

V. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules, schedules, and forms that would be 
affected by the proposed amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\321\ The Commission is submitting the 
proposed amendments to the Office of Management and Budget (``OMB'') 
for review in accordance with the PRA.\322\ The hours and costs 
associated with preparing, filing, and sending the schedules and forms 
constitute reporting and cost burdens imposed by each collection of 
information. An agency may not conduct or sponsor, and a person is not 
required to comply with, a collection of information unless it displays 
a currently valid OMB control number. Compliance with the information 
collections is mandatory. Responses to the information collections are 
not kept confidential and there is no mandatory retention period for 
the information disclosed. The titles for the collections of 
information are:
---------------------------------------------------------------------------

    \321\ 44 U.S.C. 3501 et seq.
    \322\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    ``Regulation S-K'' (OMB Control No. 3235-0071); \323\
---------------------------------------------------------------------------

    \323\ The paperwork burden for Regulation S-K is imposed through 
the forms that are subject to the requirements in this regulation 
and is reflected in the analysis of those forms. To avoid a PRA 
inventory reflecting duplicative burdens and for administrative 
convenience, we assign a one-hour burden to Regulation S-K.
---------------------------------------------------------------------------

    ``Form S-1'' (OMB Control No. 3235-0065);
    ``Form S-3'' (OMB Control No. 3235-0073);
    ``Form S-4'' (OMB Control No. 3235-0324);
    ``Form S-11'' (OMB Control No. 3235-0067);
    ``Form F-1'' (OMB Control No. 3235-0258);
    ``Form F-3'' (OMB Control No. 3235-0256);
    ``Form F-4'' (OMB Control No. 3235-0325);
    ``Form SF-1'' (OMB Control No. 3235-0707);
    ``Form SF-3'' (OMB Control No. 3235-0690);
    ``Form 10'' (OMB Control No. 3235-0064);
    ``Form 10-K'' (OMB Control No. 3235-0063);
    ``Form 10-Q'' (OMB Control No. 3235-0070);
    ``Schedule 14A'' (OMB Control No. 3235-0059).
    We adopted all of the existing regulations, schedules, and forms 
pursuant to the Securities Act and the Exchange Act. The regulations, 
schedules, and forms set forth the disclosure requirements for 
registration statements, periodic reports, and proxy and information 
statements filed by registrants to help investors make informed 
investment and voting decisions. A description of the proposed 
amendments, including the need for the information and its proposed 
use, as well as a description of the likely respondents, can be found 
in Section II above, and a discussion of the economic effects of the 
proposed amendments can be found in Section IV above.

B. Summary of the Proposed Amendments' Effects on the Collections of 
Information

    The following table summarizes the estimated effects of the 
proposed

[[Page 44385]]

amendments on the paperwork burdens associated with the affected forms 
listed in Section V.A.

                   PRA Table 1--Estimated Paperwork Burden Effects of the Proposed Amendments
----------------------------------------------------------------------------------------------------------------
           Proposed amendments and effects                    Affected forms            Estimated net effect *
----------------------------------------------------------------------------------------------------------------
Item 101(a):
     More principles-based disclosure           Forms S-1, S-4, 10,   2 hour net
     requirement, elimination of timeframe, and, for    10-K.                         decrease in compliance
     registration statements subsequent to the          Schedule 14A.......   burden per form.
     initial registration statement, requiring only                                   0.2 hour net
     an update with a hyperlink to the most recently                                  decrease in compliance
     filed disclosure that, together with the update,                                 burden per schedule.
     would present a complete discussion of the
     general development of a registrant's business,
     would decrease the paperwork burden by reducing
     repetitive and immaterial information about a
     registrant's business development. Estimated
     burden decrease: 3 hours per form; and, for
     Schedule 14A, 0.3 hour per schedule**.
     Addition of material changes to business
     strategy as a potential disclosure topic could
     increase the paperwork burden for some
     registrants, although such increase is expected
     to be minimal as many registrants already
     provide such disclosure. Estimated burden
     increase: 1 hour per form; and, for Schedule
     14A, 0.1 hour per schedule**.
Item 101(c):
     More principles-based disclosure           Forms S-1, S-4, 10,   3 hour net
     requirement is expected to decrease the            10-K.                         increase in compliance
     paperwork burden. Estimated burden decrease: 3     Schedule 14A.......   burden per form.
     hours per form; and, for Schedule 14A, 0.3 hour                                  0.3 hour net
     per schedule**.                                                                  increase in compliance
     Addition of human capital resources/                                     burden per schedule.
     measures and objectives as potential disclosure
     topic would likely increase the paperwork
     burden. Estimated burden increase: 5 hours per
     form; and, for Schedule 14A, 0.5 hour per
     schedule**.
     Addition of material government (and not
     just environmental) regulations as a potential
     disclosure topic could increase the paperwork
     burden for some registrants, although such
     increase is expected to be minimal as many
     registrants already provide such disclosure.
     Estimated burden increase: 1 hour per form; and,
     for Schedule 14A, 0.1 hour per schedule**.
Item 103:
     Expressly providing for the use of        Forms S-1, S-4, S-11, 10, 10- 3 hour net decrease in
     hyperlinks or cross-references is expected to      K, 10-Q, Schedule 14A.        compliance burden per form/
     decrease the paperwork burden by discouraging                                    schedule.
     repetitive disclosure. Estimated burden
     decrease: 1 hour per form/schedule.
     Raising the disclosure threshold for
     governmental environmental proceedings could
     also decrease the paperwork burden by reducing
     disclosure of immaterial proceedings. Estimated
     burden decrease: 2 hours per form/schedule.
Item 105:
     Summary risk factor disclosure provision   Forms S-1, S-3, S-    3 hour net
     could increase the paperwork burden for some       4, F-1, F-3, F-4, SF-1, SF-   decrease in compliance
     registrants, although such increase is expected    3.                            burden per form.
     to be minimal as the summary would consist of a    Form S-11..........   no change in
     bulleted list. Estimated burden increase: 1 hour   Forms 10, 10-K, 10-   compliance burden.
     per form, except no increase for Form S-11,***     Q.                            2 hour net
     and 0.67 hour increase per form for Forms 10, 10-                                decrease in compliance
     K, and 10-Q .                                                        burden per form.
     Summary risk factor disclosure provision
     could decrease the paperwork burden for other
     registrants to extent that it incentivizes
     registrants to provide streamlined risk factor
     disclosure focusing on the most salient risks.
     Estimated burden decrease: 4 hours per form,
     except no decrease for Form S-11,*** and 2.67
     hour decrease per form for Forms 10, 10-K, and
     10-Q .
     ``General Risk Factors'' heading
     provision could marginally increase the
     paperwork burden. Estimated burden increase: 0.5
     hour per form, except 0.33 hour increase per
     form for Forms 10, 10-K, and 10-Q .
     Substitution of ``material'' risks for
     ``most significant'' risks could marginally
     decrease the paperwork burden. Estimated burden
     decrease: 0.5 hours per form, except 0.33 hour
     decrease per form for Forms 10, 10-K, and 10-Q
     .
                                                      ----------------------------------------------------------
        Total........................................   Forms S-1, S-4.....   5 hour net
                                                        Forms S-3, S-11, F-   decrease per form.
                                                        1, F-3, F-4, SF-1, SF-3.      3 hour net
                                                        Form 10, 10-K......   decrease per form.
                                                        10-Q...............   4 hour net
                                                        Schedule 14A.......   decrease per form.
                                                                                      5 hour net
                                                                                      decrease per form.
                                                                                      2.9 hour net
                                                                                      decrease per schedule.
----------------------------------------------------------------------------------------------------------------
* Estimated effect expressed as increase or decrease of burden hours on average and derived from staff review of
  samples of relevant sections of the affected forms.
** The lower estimated average incremental burden for Schedule 14A reflects the Commission staff estimate that
  no more than 10% of the Schedule 14As filed annually include Item 101 disclosures.
*** Because Form S-11 already has a summary risk factor disclosure requirement, the proposed Item 105 amendment
  is not expected to affect the compliance burden for Form S-11 registrants.
 The reduced estimated average incremental burden for Forms 10, 10-K and 10-Q reflects the fact that
  smaller reporting companies, which comprise approximately one-third of the registrants filing those forms, are
  not required to provide Item 105 risk factor disclosure.


[[Page 44386]]

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed 
Amendments

    Below we estimate the incremental and aggregate reductions in 
paperwork burden as a result of the proposed amendments. These 
estimates represent the average burden for all registrants, both large 
and small. In deriving our estimates, we recognize that the burdens 
will likely vary among individual registrants based on a number of 
factors, including the nature of their business. We do not believe that 
the proposed amendments would change the frequency of responses to the 
existing collections of information; rather, we estimate that the 
proposed amendments would change only the burden per response.
    The burden reduction estimates were calculated by multiplying the 
estimated number of responses by the estimated average amount of time 
it would take a registrant to prepare and review disclosure required 
under the proposed amendments. For purposes of the PRA, the burden is 
to be allocated between internal burden hours and outside professional 
costs. The table below sets forth the percentage estimates we typically 
use for the burden allocation for each form. We also estimate that the 
average cost of retaining outside professionals is $400 per hour.\324\
---------------------------------------------------------------------------

    \324\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This estimate is 
based on consultations with several registrants, law firms, and 
other persons who regularly assist registrants in preparing and 
filing reports with the Commission.

  PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
                              and Schedules
------------------------------------------------------------------------
                                                            Outside
        Form/schedule type               Internal        professionals
                                        (percent)          (percent)
------------------------------------------------------------------------
Forms 10-K, 10-Q, Schedule 14A....                 75                 25
Forms S-1, S-3, S-4, S-11, F-1, F-                 25                 75
 3, F-4, SF-1, SF-3, and 10.......
------------------------------------------------------------------------

    The table below illustrates the incremental change to the total 
annual compliance burden of affected forms, in hours and in costs, as a 
result of the proposed amendments.
---------------------------------------------------------------------------

    \325\ The number of estimated affected responses is based on the 
number of responses in the Commission's current OMB PRA filing 
inventory. The OMB PRA filing inventory represents a three-year 
average. We do not expect that the proposed amendments will 
materially change the number of responses in the current OMB PRA 
filing inventory.
    \326\ The estimated reductions in Columns (C), (D) and (E) are 
rounded to the nearest whole number.

           PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Burden hour                                            Reduction in       Reduction in
                                                 Number of     reduction per     Reduction in       Reduction in       professional       professional
                    Form                         estimated        current      burden hours for  company hours for  hours for current  costs for current
                                                 affected        affected      current affected   current affected       affected           affected
                                                 responses       response         responses          responses          responses          responses
                                                   (A) \325\             (B)    (C) = (A) x (B)   (D) = (C) x 0.25   (E) = (C) x 0.75   (F) = (E) x $400
                                                                                          \326\            or 0.75            or 0.25
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.........................................             901               5              4,505              1,126              3,379         $1,351,600
S-3.........................................           1,657               3              4,971              1,243              3,729          1,491,600
S-4.........................................             551               5              2,755                689              2,066            826,400
S-11........................................              64               3                192                 48                144             57,600
F-1.........................................              63               3                189                 47                142             56,800
F-3.........................................             112               3                336                 84                252            100,800
F-4.........................................              39               3                117                 29                 88             35,200
SF-1........................................               6               3                 18                  5                 14              5,600
SF-3........................................              71               3                213                 53                160             64,000
10..........................................             216               4                864                216                648            259,200
10-K........................................           8,137               4             32,548             24,411              8,137          3,254,800
10-Q........................................          22,907               5            114,535             85,901             28,634         11,453,600
Sch. 14A....................................           5,586             2.9             16,199             12,149              4,050          1,620,000
                                             -----------------------------------------------------------------------------------------------------------
    Total...................................          40,310  ..............  .................            126,001  .................         20,577,200
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The following table summarizes the requested paperwork burden, 
including the estimated total reporting burdens and costs, under the 
proposed amendments.
---------------------------------------------------------------------------

    \327\ From Column (D) in PRA Table 3.
    \328\ From Column (F) in PRA Table 3.

                                          PRA Table 4--Requested Paperwork Burden Under the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Current burden                          Program change                     Requested change in burden
                                 -----------------------------------------------------------------------------------------------------------------------
              Form                  Current      Current                  Number of    Reduction    Reduction in
                                     annual       burden      Current      affected    in company   professional      Annual       Burden    Cost burden
                                   responses      hours     cost burden   responses      hours          costs       responses      hours
                                          (A)          (B)          (C)          (D)    (E) \327\       (F) \328\    (G) = (A)  (H) = (B) +  (I) = (C) +
                                                                                                                                        (E)          (F)
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.............................          901      148,556  $182,048,70          901        1,126      $1,351,600          901      147,430  $180,697,10
                                                                      0                                                                                0
S-3.............................        1,657      193,730  236,322,036        1,657        1,243       1,491,600        1,657      192,487  234,830,436
S-4.............................          551      565,079  678,291,204          551          689         826,400          551      564,390  677,464,804

[[Page 44387]]

 
S-11............................           64       12,290   15,016,968           64           48          57,600           64       12,242   14,959,368
F-1.............................           63       26,815   32,445,300           63           47          56,800           63       26,768   32,388,500
F-3.............................          112        4,448    5,712,000          112           84         100,800          112        4,364    5,611,200
F-4.............................           39       14,265   17,106,000           39           29          35,200           39       14,236   17,070,800
SF-1............................            6        2,076    2,491,200            6            5           5,600            6        2,071    2,485,600
SF-3............................           71       24,548   29,457,900           71           53          64,000           71       24,495   29,393,900
10..............................          216       12,072   14,356,888          216          216         259,200          216       12,018   14,032,888
10-K............................        8,137   14,220,652  1,898,891,8        8,137       24,411       3,254,800        8,137   14,190,138  1,894,823,4
                                                                     69                                                                               69
10-Q............................       22,907    3,253,411  432,290,354       22,907       85,901      11,453,600       22,907    3,167,510  420,836,754
Sch. 14A........................        5,586      551,101   73,480,012        5,586       12,149       1,620,000        5,586      538,952   72,362,812
                                 -----------------------------------------------------------------------------------------------------------------------
    Total.......................       40,310   15,775,632  3,617,910,4       40,310      126,001      20,577,200       40,310   18,897,101  3,596,957,6
                                                                     31                                                                               31
--------------------------------------------------------------------------------------------------------------------------------------------------------

Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility;
     Evaluate the accuracy and assumptions and estimates of the 
burden of the proposed collection of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collection of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the U.S. Securities 
and Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and send a copy to, Vanessa A. Countryman, 
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File No. S7-11-19. 
Requests for materials submitted to OMB by the Commission with regard 
to the collection of information should be in writing, refer to File 
No. S7-11-19 and be submitted to the U.S. Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this proposed rule. Consequently, a comment to OMB is best assured of 
having its full effect if the OMB receives it within 30 days of 
publication.

VI. Regulatory Flexibility Act Certification

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (``RFA'') \329\ requires the agency to prepare and make 
available for public comment an Initial Regulatory Flexibility Analysis 
(``IRFA'') that will describe the impact of the proposed rule on small 
entities.\330\ Section 605 of the RFA allows an agency to certify a 
rule, in lieu of preparing an IRFA, if the proposed rulemaking is not 
expected to have a significant economic impact on a substantial number 
of small entities.\331\
---------------------------------------------------------------------------

    \329\ 5 U.S.C. 601 et seq.
    \330\ 5 U.S.C. 603(a).
    \331\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    Although the rule proposal would have an impact on a substantial 
number of small entities,\332\ the Commission expects that the impact 
on entities affected by the proposed rule would not be 
significant.\333\ The primary effects of the rule proposal would be to: 
(1) Increase the flexibility for an entity when providing disclosure 
regarding its business, including its general business development, so 
that it can tailor its disclosure to its particular circumstances; (2) 
eliminate or reduce disclosure about matters that are not material to 
an understanding of the business or to an entity's legal proceedings; 
and (3) encourage risk factor disclosure that is shorter and concerns 
only material risks. As a result of these effects, we expect that the 
impact of the rule proposal would be a reduction in the paperwork 
burden of affected entities, including small entities, and that the 
overall impact of the paperwork burden reduction would be modest and 
would be beneficial to small entities.\334\ Accordingly, the Commission 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed 
amendments to Items 101, 103, and 105 of Regulation S-K, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \332\ Approximately 2,283, or 33%, of the registrants filing on 
domestic forms in 2018 were small entities. See supra Section IV.A.
    \333\ See Section IV.B.
    \334\ We estimate that the proposed amendments are likely to 
result in a net decrease of between three and five burden hours per 
form for purposes of the Paperwork Reduction Act. See supra Section 
V.B.
---------------------------------------------------------------------------

Request for Comment
    We request comment on this certification. In particular, we solicit 
comment on the following: Do commenters agree with the certification? 
If not, please describe the nature of any impact of the proposed 
amendments on small entities and provide empirical data to illustrate 
the extent of the impact. Such comments will be considered in the 
preparation of the final rules (and in a Final Regulatory Flexibility 
Analysis if one is needed) and, if the proposed rules are adopted, will 
be placed in the same public file as comments on the proposed rules 
themselves.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\335\ the Commission must advise OMB as to whether 
the proposed amendments constitute a ``major'' rule. Under SBREFA, a 
rule is considered ``major'' where, if adopted, it results or is likely 
to result in:
---------------------------------------------------------------------------

    \335\ 5 U.S.C. 801 et seq.

---------------------------------------------------------------------------

[[Page 44388]]

     An annual effect on the U.S. economy of $100 million or 
more (either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether the proposed amendments would be a 
``major rule'' for purposes of SBREFA. In particular, we request 
comment on the potential effect of the proposed amendments on the U.S. 
economy on an annual basis; any potential increase in costs or prices 
for consumers or individual industries; and any potential effect on 
competition, investment or innovation. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.

VIII. Statutory Authority and Text of Proposed Rule and Form Amendments

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 7, 10, and 19(a) of the Securities 
Act, as amended, and Sections 3, 12, 13, 15, and 23(a) of the Exchange 
Act, as amended.

List of Subjects in 17 CFR Parts 229, 239, and 240

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

    In accordance with the foregoing, the Commission is proposing to 
amend title 17, chapter II of the Code of Federal Regulations as 
follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
1. The authority citation for part 229 continues to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 
80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350; 
Sec. 953(b) Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 102(c), 
Pub. L. 112-106, 126 Stat. 310 (2012).

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2. Amend Sec.  229.101 by:
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a. Revising paragraphs (a) introductory text and (a)(1);
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b. Redesignating paragraph (a)(2) as paragraph (a)(3);
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c. Adding new paragraph (a)(2); and
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d. Revising paragraphs (c) and (h) introductory text.
    The revisions and addition read as follows:


Sec.  229.101  (Item 101) Description of business.

    (a) General development of business. Describe the general 
development of the business of the registrant, its subsidiaries, and 
any predecessor(s).
    (1) In describing developments, only information material to an 
understanding of the general development of the business is required. 
Disclosure may include, but should not be limited to, the following 
topics:
    (i) Transactions and events that affect or may affect the company's 
operations, including material changes to a previously disclosed 
business strategy;
    (ii) Bankruptcy, receivership, or any similar proceeding;
    (iii) The nature and effects of any material reclassification, 
merger or consolidation of the registrant or any of its significant 
subsidiaries; and
    (iv) The acquisition or disposition of any material amount of 
assets otherwise than in the ordinary course of business.
    (2) For filings other than initial registration statements, a full 
discussion of the general development of the registrant's business is 
not required. For such filings, an update to the general development of 
the business disclosure with a focus on material developments in the 
reporting period may be provided instead of a full discussion. If a 
full discussion of the general development of the registrant's business 
is not included, pursuant to Sec.  230.411 or Sec.  240.12b-23 of this 
chapter as applicable, incorporate by reference, and include an active 
hyperlink to, the registrant's most recently filed disclosure that, 
together with the update, would present the full discussion of the 
general development of its business.
* * * * *
    (c) Description of business. (1) Describe 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. 
When describing each segment, include the information specified in 
paragraphs (c)(1)(i) through (v) of this section, to the extent such 
information is material to an understanding of the business taken as a 
whole.
    (i) Revenue-generating activities, products and/or services, and 
any dependence on revenue-generating activities, key products, 
services, product families or customers, including governmental 
customers;
    (ii) Status of development efforts for new or enhanced products, 
trends in market demand and competitive conditions;
    (iii) Resources material to a registrant's business, such as:
    (A) Sources and availability of raw materials; and
    (B) The duration and effect of all patents, trademarks, licenses, 
franchises and concessions held;
    (iv) 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; and
    (v) The extent to which the business is or may be seasonal.
    (2) Discuss the information specified in paragraphs (c)(2)(i) and 
(ii) of this section with respect to, and to the extent material to an 
understanding of, the registrant's business taken as a whole, except 
that, if the information is material to a particular segment, you 
should additionally identify that segment.
    (i) The material effects that compliance with material government 
regulations, including environmental regulations, may have upon the 
capital expenditures, earnings and competitive position of the 
registrant and its subsidiaries. Include in such disclosure material 
estimated capital expenditures for environmental control facilities for 
the current fiscal year and any other subsequent period that the 
registrant deems material; and
    (ii) 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 (such as, depending 
on the nature of the registrant's business and workforce, measures or 
objectives that address the attraction, development, and retention of 
personnel).
* * * * *
    (h) Smaller reporting companies. A smaller reporting company, as 
defined by Sec.  229.10(f)(1), may satisfy its obligations under this 
Item by describing the development of its business pursuant to this 
paragraph (h), except that, for filings other than initial registration 
statements, a smaller reporting company may provide an update to the 
general development of the business disclosure, instead of a full 
discussion, which complies with paragraph (a)(2) of this section. If 
the smaller reporting company has not been in business for three years, 
give the same information for predecessor(s) of

[[Page 44389]]

the smaller reporting company if there are any. This business 
development description should include:
* * * * *
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3. Revise Sec.  229.103 to read as follows:


Sec.  229.103   (Item 103) Legal proceedings.

    (a) Describe briefly any material pending legal proceedings, other 
than ordinary routine litigation incidental to the business, to which 
the registrant or any of its subsidiaries is a party or of which any of 
their property is the subject. Include the name of the court or agency 
in which the proceedings are pending, the date instituted, the 
principal parties thereto, a description of the factual basis alleged 
to underlie the proceedings and the relief sought. Include similar 
information as to any such proceedings known to be contemplated by 
governmental authorities. Information may be provided by hyperlink or 
cross-reference to legal proceedings disclosure elsewhere in the 
document, such as in Management's Discussion & Analysis (MD&A), Risk 
Factors and notes to the financial statements.
    (b) No information need be given under this section for 
proceedings:
    (1) That involve negligence or other claims or actions if the 
business ordinarily results in such claims or actions, unless the claim 
or action departs from the normal kind of such claims or actions; or
    (2) That involve primarily a claim for damages if the amount 
involved, exclusive of interest and costs, does not exceed 10 percent 
of the current assets of the registrant and its subsidiaries on a 
consolidated basis. However, if any proceeding presents in large degree 
the same legal or factual issues as other proceedings pending or known 
to be contemplated, the amount involved in such other proceedings shall 
be included in computing such percentage.
    (c) Notwithstanding paragraph (b) of this section, disclosure under 
this section shall include, but shall not be limited to:
    (1) Any material bankruptcy, receivership, or similar proceeding 
with respect to the registrant or any of its significant subsidiaries;
    (2) Any material proceedings to which any director, officer or 
affiliate of the registrant, any owner of record or beneficially of 
more than five percent of any class of voting securities of the 
registrant, or any associate of any such director, officer, affiliate 
of the registrant, or security holder is a party adverse to the 
registrant or any of its subsidiaries or has a material interest 
adverse to the registrant or any of its subsidiaries;
    (3) Administrative or judicial proceedings (including proceedings 
which present in large degree the same issues) arising under any 
Federal, State, or local provisions that have been enacted or adopted 
regulating the discharge of materials into the environment or primarily 
for the purpose of protecting the environment. Such proceedings shall 
not be deemed ``ordinary routine litigation incidental to the 
business'' and shall be described if:
    (i) Such proceeding is material to the business or financial 
condition of the registrant;
    (ii) Such proceeding involves primarily a claim for damages, or 
involves potential monetary sanctions, capital expenditures, deferred 
charges or charges to income and the amount involved, exclusive of 
interest and costs, exceeds 10 percent of the current assets of the 
registrant and its subsidiaries on a consolidated basis; or
    (iii) A governmental authority is a party to such proceeding and 
such proceeding involves potential monetary sanctions, unless the 
registrant reasonably believes that such proceeding will result in no 
monetary sanctions, or in monetary sanctions, exclusive of interest and 
costs, of less than $300,000; provided, however, that such proceedings 
which are similar in nature may be grouped and described generically.
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4. Revise Sec.  229.105 to read as follows:


Sec.  229.105   (Item 105) Risk factors.

    (a) Where appropriate, provide under the caption ``Risk Factors'' a 
discussion of the material factors that make an investment in the 
registrant or offering speculative or risky. This discussion must be 
organized logically with relevant headings and each risk factor should 
be set forth under a subcaption that adequately describes the risk. The 
presentation of risks that could apply generically to any registrant or 
any offering is discouraged, but to the extent generic risk factors are 
presented, disclose them at the end of the risk factor section under 
the caption ``General Risk Factors.''
    (b) Concisely explain how each risk affects the registrant or the 
securities being offered. If the discussion is longer than 15 pages, 
include in the forefront of the prospectus or annual report, as 
applicable, a series of short, concise, bulleted or numbered statements 
summarizing the principal factors that make an investment in the 
registrant or offering speculative or risky. If the risk factor 
discussion is included in a registration statement, it must immediately 
follow the summary section. If you do not include a summary section, 
the risk factor section must immediately follow the cover page of the 
prospectus or the pricing information section that immediately follows 
the cover page. Pricing information means price and price-related 
information that you may omit from the prospectus in an effective 
registration statement based on Rule 430A (Sec.  230.430A of this 
chapter). The registrant must furnish this information in plain 
English. See Sec.  230.421(d) of Regulation C of this chapter.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

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5. The authority citation for part 239 continues to read as follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 
312, unless otherwise noted.
* * * * *
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6. Amend Form S-4 (referenced in Sec.  239.25) by revising paragraph 
(b)(3)(i) of Item 12 under Part I, Section B (``Information About the 
Registrant'') to read as follows:
    Note: The text of Form S-4 does not, and this amendment will not, 
appear in the Code of Federal Regulations.

United States Securities and Exchange Commission

Washington, DC 20549

Form S-4

Registration Statement Under the Securities Act of 1933

* * * * *

Part I

Information Required in the Prospectus

* * * * *

B. Information About the Registrant

* * * * *
    Item 12. Information with Respect to S-3 Registrants.
* * * * *
    (b) * * *
    (3) Furnish the information required by the following:
    (i) Item 101(c)(1)(i) of Regulation S-K (Sec.  229.101(c)(1)(i) of 
this chapter), industry segments, key products or services;
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

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7. The authority citation for part 240 continues to read as follows:


[[Page 44390]]


    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, 
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
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8. Amend Sec.  240.14a-101 by revising paragraph (a) of Item 7 of 
Schedule 14A to read as follows:


Sec.  240.14a-101  Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 7. Directors and executive officers. * * *
    (a) The information required by Item 103(c)(2) of Regulation S-K 
(Sec.  229.103(c)(2) of this chapter) with respect to directors and 
executive officers.
* * * * *

    By the Commission.

    Dated: August 8, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-17410 Filed 8-22-19; 8:45 am]
 BILLING CODE 8011-01-P

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