SEC Proposes to Modernize Risk Factor, Business Description and Legal Proceedings Disclosure Rules

Shearman & Sterling LLP

On August 8, 2019, the U.S. Securities and Exchange Commission (SEC) proposed amendments (the “Proposed Rule”) to modernize its existing requirements for how companies disclose risk factors and describe their business and developments in their business and legal (including environmental) proceedings in their periodic reports and registration statements filed with the SEC. The Proposed Rule would update Regulation S-K, which contains the line-item requirements for non-financial statement disclosures in SEC filings. The Proposed Rule is the latest in a series of SEC rulemakings (see “Another Wave of Disclosure Simplification Rules Adopted by the SEC” and “SEC Disclosure Simplification Continues”) aimed at modernizing the disclosure regime for public companies through following a more principles-based, as opposed to prescriptive, approach to disclosure and through formally adopting best practices and existing SEC interpretative guidance. 

We summarize below the proposed rule changes and highlight in particular how these would affect foreign private issuers.

The deadline for submitting comments on the Proposed Rule is expected to be around mid-October. The SEC will consider the comments received from the public on the proposed amendments, and any changes will take effect only once the SEC publishes a final rule release.

Risk Factors

The Proposed Rule seeks to alleviate the compliance burden on companies while making risk factor disclosure easier for investors to read and understand. In particular, the SEC notes that, over the years, risk factor disclosures have tended to become lengthier and include generic, boilerplate risks that are not specifically tailored to a particular company’s business. This trend has primarily been driven by the impulse that more risk disclosure equals more protection against liability when things go bad.

In an attempt to balance the protection risk factor disclosure provides against litigation with the aim of encouraging better disclosure—that is, disclosure that is clearer, better organized and that makes it easier for investors to understand a company’s risk profile—the Proposed Rule would require companies to:

  • Include a risk factor summary if the risk factors section exceeds 15 pages—The summary, which would be located in the forepart of the document, would consist of a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the company or offering speculative or risky.
  • Disclose “material” risks—The current rule and SEC guidance requires companies to disclose in the risk factors section the “most significant” risks relating to an investment in the company’s securities. The Proposed Rule would amend this to instead refer to “material” risks, with the aim of encouraging companies to focus on risks to which reasonable investors would attach importance in making investment decisions.
  • Organize risk factors under relevant headings—The Proposed Rule would codify a best practice already followed by many companies by requiring similar risk factors to be grouped together under relevant headings in an effort to help readers better comprehend lengthy risk factor disclosures. To the extent a company chooses to include generic risk factors that are not specifically tailored to the company’s risk profile, these would need to be grouped together at the end of the risk factors section under the heading “General Risk Factors.”

Relevance to Foreign Private Issuers

The Proposed Rule would amend the risk factor disclosure requirements for registration statements on Forms F 1, F 3 and F 4 (the forms used by foreign private issuers to make offerings of securities). While the SEC is not proposing to change Form 20 F (the form used by foreign private issuers to file annual reports), the Proposed Rule solicits comments on whether the Form 20 F rules should be similarly amended. Changes to the SEC disclosure standards applicable to foreign private issuers may also, by analogy, affect disclosure practice in exempt offerings under Securities Act Rule 144A.

Notably, the Proposed Rule would align U.S. risk factor disclosures more closely with the recent changes in Europe under the new EU Prospectus Regulation (Regulation (EU) 2017/1129) that took effect in July 2019. For example, the EU Prospectus Regulation requires a summary of the most material risks (not to exceed 15 risk factors) specific to the issuer and the securities to be included in the summary section of a prospectus. In the main risk factors section, the EU Prospectus Regulation requires that risk factors be specific to the issuer or the securities being offered—generic risks that serve only as disclaimers may not be included—and organized by category depending on their nature.

General Development of Business and Narrative Description of Business

The Proposed Rule seeks to make the disclosure rules requiring companies to describe their businesses, and developments in their business, more flexible in light of the varied nature of modern businesses and therefore more useful to investors. The current rule (Item 101(c) of Regulation S-K) enumerates a list of items that must be included in the narrative description of the company’s business, discussed on a reporting segment level. The Proposed Rule would take a more principles-based approach by including a non-exhaustive list of topics and clarifying that disclosure responsive to each topic is required only to the extent material to an understanding of the company’s business.

The Proposed Rule would also make the following changes to Item 101(a) and (c) of Regulation S-K:

  • Human capital—The current form requires disclosure of the number of employees. Recognizing that the size and profitability of modern enterprises is often not correlated to their number of employees, the Proposed Rule would replace this with a requirement to discuss the company’s human capital resources, including measures or objectives that address the attraction, development and retention of employees, contractors or other human capital relevant to the company.
  • Updates only—After a company’s initial registration statement, the description of developments in the company’s business can be limited to material changes since the last filing containing the full description, with the prior filing (from an earlier year, or a registration statement) hyperlinked and incorporated by reference.
  • Eliminate prescribed time period—The current form requirements specifically elicit disclosure of the development of the business over the last five years, or such shorter time as the company been in business. This prescriptive requirement dates back to 1935 and does not reflect the current wide range of SEC reporting companies, from those with many decades of track record to start-ups for which each month may be critical. The Proposed Rule would direct companies to provide information material to an understanding of the development of their business, irrespective of timeframe.
  • Material changes to business strategy—While strategic transactions are captured by the current form requirements, the Proposed Rule would require disclosure of material changes to a company’s previously disclosed business strategy, even if they have yet to have a material impact on the company.
  • Reducing overlap—The Proposed Rule recognizes that financial statement disclosure and the related management’s discussion and analysis (MD&A)/operating and financial review and prospects (OFR) disclosure has progressed since the existing requirements were adopted. In an effort to reduce overlapping disclosure, the Proposed Rule would remove items such as working capital practices and backlog orders believed to be firm from the narrative description of the business section, with the expectation that these will be addressed, to the extent material, in the MD&A.

Relevance to Foreign Private Issuers

The equivalent Form 20-F disclosure requirements, contained in Items 4.A and 4.B, are one area in which disclosure by foreign private issuers is already moderately less prescriptive than that required of U.S. domestic registrants, as Form 20-F was revised in 1999 to align more closely to international standards. The Proposed Rule would not affect these. There is some concern that updating Form 20-F to align to the Proposed Rule could result in foreign private issuers losing the ability to use the same disclosure in multiple jurisdictions.

Legal Proceedings

  • Bright-line environmental threshold—The current form requirements contain a bright-line rule requiring disclosure of environmental proceedings to which the government is a party if the potential monetary sanction is at least $100,000, with such level not having increased since it was set in 1982. While the Proposed Rule solicits comment on whether a materiality standard should be used for this disclosure, it proposes to retain the bright-line approach, albeit with an inflation-based increase to $300,000, in recognition of the factual and legal complexity of environmental proceedings.
  • Cross-references—While the Proposed Rule acknowledges that litigation disclosure required to be disclosed in the financial statements under U.S. GAAP or IFRS or included in risk factors accomplishes different goals than the disclosure elicited by Item 103 of Regulation S-K, it recognizes that companies frequently make use of the same disclosures in order to satisfy both requirements, and so will explicitly allow cross-references and incorporation by reference of legal proceedings disclosure in response to Item 103.

Relevance to Foreign Private Issuers

The Proposed Rule would not affect foreign private issuers. While Form 20-F does not include a similar bright-line test with respect to environmental proceedings, it does include a requirement to disclose legal or arbitral proceedings (including governmental proceedings) which may have or have had a “significant effect” on the company’s financial position or profitability.

[View source.]

Written by:

Shearman & Sterling LLP
Contact
more
less

Shearman & Sterling LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.