The SEC has adopted amendments to modernize certain disclosure requirements set forth in Regulation S-K. Specifically, the SEC updated the items governing a company’s description of environmental proceedings in which the government is a party, as well as its business, legal proceedings and risk factors. These amendments are the first substantial changes to these Regulation S-K items in 30 years and represent a continued attempt by the SEC to update and streamline disclosures.
Since 1982, public companies have been required to disclose any environmental proceedings which the company reasonably believes will result in sanctions of $100,000 or more. With the recent amendments, the SEC has updated this materiality threshold to $300,000 to account for inflation. In addition, the SEC has allowed companies to use an alternative threshold (larger than $300,000). The alternative threshold must be designed to reasonably result in the disclosure of any proceeding material to the company’s business or financial condition. The alternative threshold may not exclude any proceedings involving potential sanctions of $1 million or more or one percent of the company’s current assets (whichever is less). Any company opting to use this alternative threshold must disclose the threshold in each annual and quarterly report. According to the SEC, giving companies the option of a bright-line, quantitative test and the flexibility to design a more tailored threshold will help companies disclose more relevant and important information for investors.
With the recent amendments, the SEC has continued its push to modify disclosure rules to be more principles-based, rather than a prescriptive one-size-fits-all form. The modified rules focus on allowing companies to disclose what is material – both to their business and investors seeking to understand the company. Thus, discretion is being granted to company management to develop effective disclosures.
As the quarter comes to a close, public companies should consider whether their disclosures must be updated to comply with the rule changes.
