SEC Mandates Disclosure Of ‘Human Capital’ Resources

Fox Rothschild LLP

Fox Rothschild LLP

By a 3-2 vote along party lines, the U.S. Securities and Exchange Commission (SEC) adopted sweeping changes to Regulation S-K, the regulation primarily concerned with its public company disclosure regime. Public companies must now describe their “human capital” resources. These disclosures were the first significant revisions in 30 years to this Regulation. The rules became effective on September 26, 2020.

Prior Disclosure Requirements

Public companies were previously required disclose the number of persons employed by the entity. Some companies distinguished between the number of full-time and part-time employees, while others specified the number of employees for each department or division. Companies with large numbers of employees disclosed an approximate number of employees. Public companies also generally disclosed the number of employees who are represented by a labor union.

The SEC issued a Concept Release soliciting input on this disclosure requirement, asking, among other things, if this numeric disclosure is still important to investors and whether any improvements should be made. Some commenters recommended that the requirement be retained and expanded, while others questioned its continued relevance.

SEC Proposal

The SEC proposed new rules to amend Item 101(c), essentially replacing the prior requirement to disclose the number of persons employed by the public company (known as a “registrant”), and mandating a description of the registrant’s human capital resources. The proposed rule would have included a description of any human capital measures or objectives that management focused on to manage the business, if those disclosures were material to the registrant’s business. However, that term was not defined, but merely included certain examples of human capital measures and objectives that may be material. Of course, the materiality of these examples depended on the registrant’s business and employees, including hiring, training and retention.

The SEC sought comment on these proposals and whether it should inquire as to the number and types of employees – full-time, part-time, seasonal and temporary workers. Some commenters approved of this potential requirement, suggesting comparability and the ease for investors to compare and contrast companies. Other comments suggested broader definitions because companies are different. Additionally, some sought to make these mandatory disclosures.

The SEC also requested comments regarding whether it should formally define the term “human capital.” There were a variety of opinions on this topic, reaching no consensus, where one commenter suggested it was a very complex concept with many parts and no consensus definition that could apply across different industries and companies. The SEC also asked for input as to whether the number of employees of a registrant should continue to be disclosed. Most commenters seemed to agree it should remain with further information; a few asserted that the requirement was outdated.

Final SEC Rules

Ultimately the SEC adopted new rules that were similar to its proposals.

Item 101(c) will now require the registrant to describe its human capital resources, including, but not limited to, any human capital measures or objectives, focusing on the registrant’s management of its business. The SEC reaffirmed that these disclosures are important to investors and are often critical to companies and their management.

In addition, the SEC seems to suggest a company’s human capital measures should include measures that identify, attract, develop and retain personnel, depending upon their business and workforce. However, the SEC considers these to be “potentially relevant subjects, not mandates.” The SEC suggested it wanted each company to take these measures and apply them to their business. There were no specific requirements for disclosure, but the SEC sought to move away from prescriptive requirements or a designated standard or framework. According to an SEC release, the agency wants the focus on a “principles-based” approach to disclosure, which is essentially an effort to encourage companies to focus on their own “particular facts and circumstances” in disclosing risk. Further, we note that the SEC claims that a principles-based approach will allow registrants certain flexibility as to disclosures taking into consideration unique circumstances of each issue.

The SEC chose not to adopt a definition for the term “human capital,” but will allow it to evolve over time and become industry and business specific.

The SEC did, however, continue to require registrants to disclose the number of persons employed. The SEC agreed that this information was critical to understanding the registrant’s business and operations, as well as helpful in ascertaining a company’s management of its human resource issues. The SEC did not include other items suggested by the commenters. Instead, the SEC relied upon its principles-based approach to Item 101(c), claiming more information may be forthcoming to understand the registrant’s business.


The SEC’s new rules have already caused difficulty for companies in assessing human capital from the human resources point of view. That is, there is no guarantee these disclosures will adequately detail the various issues arising in a company’s human resources function. Additionally, it is possible that there will be a potential for hiding human resources problems.

Essentially, the SEC has not improved clarity, but likely created more confusion when attempting to implement these new changes.

[View source.]

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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