A Survey of Recent SEC Comment Letters on Human Capital Disclosures

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Late last year, the Securities and Exchange Commission (SEC) adopted amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make according to Regulation S-K.  An important component of these updates was the new requirement in Item 101 (Description of Business) of Regulation S-K to require registrants to make certain human capital disclosures to the extent material to an understanding of its business as a whole.

The new rule amended Item 101(c) to require registrants to provide “a description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business.” The disclosure is only required to the extent such information is material to the registrant’s business as a whole, and the SEC in the adopting release stated that each registrant’s disclosure “must be tailored to its unique business, workforce, and facts and circumstances.”

As a result of these amendments, along with disclosing the number of employees, companies must also consider how to comply with the new principle-based rule. The SEC intentionally did not define “human capital,” reasoning that the term “may evolve over time and may be defined by different companies in ways that are industry specific.” The adopted rule states that the required disclosures may include “measures or objectives that address the development, attraction and retention of personnel.” But the SEC made clear that these are just “examples of potentially relevant subjects, not mandates.” Thus, companies have broad discretion in deciding which human capital measures to disclose.

Now that we have cycled through a 10-K period for calendar year companies with the new human capital disclosures, we decided to take an opportunity to review any SEC comment letters on human capital disclosures to gain insight on the SEC Staff’s review of these disclosures as well as lessons learned for companies that are considering revisions to their disclosures in the future.  We present our findings below.

Summary Observations

At the outset, our findings below are based on a review of SEC Staff comment letters and the revised filings associated with those reviews.  Interestingly, none of the SEC Staff comment letters related to a Staff’s review of a 10-K filing, with most letters involving registration statements under the Securities Act of 1933.  (Perhaps this is not too surprising given the lag between the 10-K filing season (e.g., February/March timeframe) and typical timeline to resolve comment letters and when they are made public.)

Our research revealed general trends of how companies have been responding to the new disclosure requirements. When the SEC sought more information from companies about human capital disclosures, the original filings most often included the number of employees and the location of such employees. In addition, these filings sometimes disclosed:

  • Whether employees are represented by a labor union or covered by a collective bargaining agreement.
  • Status of the company’s relationship with employees (e.g., good, satisfactory).
  • Whether the company experienced any material work stoppages in recent years.

As reflected in the underlying data chart linked here, the SEC Staff’s comment on the human capital disclosures often simply cited the new regulation without any further explanation or guidance. However, an analysis of the revised filings by the registrants in response to the SEC Staff’s comments shines more light on the SEC’s expectations, or at least how registrants interpreted the requirements. While there were broad differences in which and how many human capital metrics companies disclosed, the following were the most common:

  • Number of employees.
  • Geographical distribution of employees.
  • Breakdown of types of employees (e.g., full-time, part-time, seasonal).
  • Steps taken to identify, recruit, and retain new and existing employees.
  • Commitments to diversity and inclusion.
  • Whether employees are represented by a labor union or covered by a collective bargaining agreement.
  • Status of the company’s relationship with employees (e.g., good, satisfactory).
  • Employee incentives and benefits (e.g., insurance packages, stock-based compensation awards, cash-based performance bonus awards).
  • Employee learning/development/training programs.
  • Core values (e.g., learning, development, inclusion, diversity, teamwork).
  • Social impact and social justice initiatives.
  • Impact of and response to the COVID-19 pandemic.
  • Employee safety measures.
  • Diversity statistics.
  • Use of employee engagement surveys.

It is clear from our review that human capital disclosures are individualized and industry-dependent. Most filings addressed only a few of these subjects. Companies also varied in taking a qualitative or quantitative approach in response to comments, but the general theme is that quantitative information was typically not provided in the response, and, if it was, the information related to diversity statistics.

We will continue to monitor SEC developments in this area.  In particular, recent media reports indicate that the SEC is actively working on a new proposed rule that would require public companies to disclose more data about their human capital.

The authors would like to acknowledge the contribution of summer associate Callie Leopard.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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