Securities and Exchange Commission Open Meeting
Securities and Exchange Commission
Wednesday, August 26, 2020
Chairman Jay Clayton
In his opening statement, Clayton noted that the Commission would consider amendments to modernize the description of business, legal proceedings, and risk factor disclosures that companies are required to make under Regulation S-K, saying that these amendments are part of the Commission’s broader efforts to retroactively review and improve the public company disclosure framework and related requirements. He noted that these items have not been updated in roughly 30 years despite the world economy changing markedly in that time. He said the rules build on the materiality-based disclosure framework, which provides countless benefits to the markets, investors, and the economy broadly. He highlighted his support for the requirement in the rules that companies must describe their human capital resources, including any human capital measures or objectives they focus on in managing the business, to the extent material to an understanding of the company’s business as a whole, saying that human capital accounts for and drives long-term business value in many companies much more so than it did 30 years ago and that shift is reflected in this rule. Clayton said the rules are designed to elicit disclosure tailored to each company’s particular industry and business model, while being flexible enough to continue to allow for fulsome disclosure as businesses evolve in the future.
Modernization of Regulation S-K Items 101, 103, and 105
- William Hinman, Division of Corporation Finance
- Felicia Kung, Division of Corporation Finance
- Sean Harrison, Division of Corporation Finance
- S.P. Kothari, Division of Economic and Risk Analysis
Hinman explained that the amendments update the disclosure requirements of Regulation S-K, particularly items 101, 103 and 105 that address the description of business, legal proceedings, and risk factor disclosures. He highlighted that the amendments will improve the readability of disclosures and discourage the inclusion of information that is not material. He noted that the SEC considered the comments and input of the public, in particular feedback on whether the requirements provide investors with the information they need to make informed decisions. He said the rules further the SEC’s commitment to a principles-based approach, saying that modernizing these items will improve disclosures while reducing costs and burdens.
Kothari explained that the economic analysis of the amendments considered their cost, benefit, and potential impacts on investors, registrants, efficiency and capital formation. He expressed that this analysis predicts both investors and registrants will benefit and the elimination of the disclosure of non-material information will result in better informed investment decisions and reduced compliance costs. He concluded that emphasizing a principles-based approach and allowing more flexibility may result in the elimination of some information for investors, but such a loss would be limited because registrants would still be required to disclose if that information is material.
Commissioner Hester M. Peirce
In her statement, Peirce called the amendments common sense reforms that continue the Commission’s efforts to modernize, simplify, and update public company disclosure requirements. She continued that the release represents another step in the right direction by making the rules more principles-based and rooted in materiality, which provides registrants with sufficient flexibility to tailor disclosures to their unique circumstances. She noted the she would have preferred to eliminate the remaining vestiges of a prescriptive approach, such as the requirement to disclose the number of employees, saying that metric might be material for some companies under some circumstances, but not for others. She noted her view that the summary risk factor disclosure is “a bit of an experiment,” questioning whether the penalty of having to prepare a summary is sufficient to overcome the fear of litigation that pushes companies to disclose many pages of risks.
Commissioner Elad L. Roisman
In his statement, Roisman said the disclosures being modified allow investors to assess a particular company’s prospects for success, including whether the company has an understanding of the risks it faces and how it plans to address them, highlighting that it has been nearly 30 years since these requirements have been significantly revised. He said the amendments will allow public reporting companies to present more clearly the information that they consider material in running their businesses and that such a shift away from dated, prescriptive disclosure requirements to a more principles-based disclosure regime will have tremendous benefits for investors who will now be able to focus their attention on material information that better captures the circumstances of each particular company.
Commissioner Allison Herren Lee
In her statement, Lee criticized that the rule does not address diversity and climate risk disclosures despite thousands of public comments seeking disclosure on workforce development, diversity and climate risk. She highlighted that recent events have provided a real-time case study on the need for many of these disclosures, saying it has never been more clear that investors need information regarding how companies treat and value their workers, how they prioritize diversity in the face of profound racial injustice, and how their assets and business models are exposed to climate risk as the frequency and intensity of climate events increase. Lee noted that these issues generally fall under environmental, social, and governance (ESG) risk, saying that ESG investing is no longer just a matter of personal choice, but rather asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers and stock exchanges use ESG as a significant driver in decision-making, capital allocation, pricing, and value assessments. She criticized the Commission for taking the position that it does not need to require or specify these types of disclosures. She said that while there is room for discussion as to which specific ESG risks and impacts should be disclosed and how, the Commission must lead the discussion.
Commissioner Caroline Crenshaw
In her statement, Crenshaw expressed her agreement with Lee’s views and concern that the Commission is failing to take the opportunity to provide investors with critical and useful information about key corporate metrics. She said that though the rule is presented as a modernization of certain provisions of Regulation S-K, it fails to deal adequately with two significant modern issues affecting financial performance: climate change risk and human capital. She noted that the final rule is also silent on diversity, an issue that is extremely important to investors and to the national conversation, and the failure to grapple with these issues is a failure to modernize. She continued that the Commission’s steps to modernize the securities laws should facilitate the efficient comparison of long-term sustainability in the face of present-day risks to issuers, and the failure to address climate change risk continues to hamper the efficient sorting and comparison of modern companies, as does the failure to adopt detailed, specific disclosure requirements concerning human capital. She suggested that the Commission should form an internal task force to undertake an immediate study on how investors can and do use information about human capital management, climate change risk, and other ESG metrics to assess the long-term financial performance of a company and form an external ESG Advisory Committee to provide advice and guidance over the longer term.
The amendments were approved in a 3-2 vote with Commissioners Lee and Crenshaw dissenting.
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