Document ID: SEC-2020-1586-0001
Agency: sec
Document Type: Rule
Title: Modernization of Regulation S-K Items 101, 103, and 105
Posted Date: 2020-10-08T04:00Z

[Federal Register Volume 85, Number 196 (Thursday, October 8, 2020)]
[Rules and Regulations]
[Pages 63726-63761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19182]

[[Page 63725]]

Vol. 85

Thursday,

No. 196

October 8, 2020

Part III

Securities and Exchange Commission

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17 CFR 229, 239, and 240

Modernization of Regulation S-K Items 101, 103, and 105; Final Rule

  Federal Register / Vol. 85 , No. 196 / Thursday, October 8, 2020 / 
Rules and Regulations  

[[Page 63726]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR 229, 239, and 240

[Release Nos. 33-10825; 34-89670; File No. S7-11-19]
RIN 3235-AL78

Modernization of Regulation S-K Items 101, 103, and 105

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to modernize the description of business, legal 
proceedings, and risk factor disclosures that registrants are required 
to make pursuant to Regulation S-K. These disclosure items have not 
undergone significant revisions in over 30 years. The amendments update 
these rules to account for developments since their adoption or last 
revision, to improve disclosure for investors, and to simplify 
compliance for registrants. Specifically, the amendments are intended 
to improve the readability of disclosure documents, as well as 
discourage repetition and the disclosure of information that is not 
material.

DATES: The final rules are effective on November 9, 2020.

FOR FURTHER INFORMATION CONTACT: Sean Harrison, Office of Rulemaking, 
at (202) 551-3430, in the Division of Corporation Finance, U.S. 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION: The Commission is amending

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          Commission reference                 CFR citation (17 CFR)
------------------------------------------------------------------------
Regulation S-K:.........................  Sec.   229.10 et seq.
    Item 101............................  Sec.   229.101.
    Item 103............................  Sec.   229.103.
    Item 105............................  Sec.   229.105.
Securities Act of 1933 (Securities Act):
 \1\
    Form S-4............................  Sec.   239.25.
Securities Exchange Act of 1934
 (Exchange Act): \2\
    Schedule 14A........................  Sec.   240.14a-101.
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Table of Contents
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
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I. Introduction and Background
II. Discussion of the Amendments
    A. General Development of Business (Item 101(a))
    1. Elimination of the Five-Year and the Three-Year Disclosure 
Timeframes
    a. Proposed Amendments
    b. Comments on the Proposed Amendments
    c. Final Amendments
    2. Updated Disclosure in Subsequent Filings
    a. Proposed Amendments
    b. Comments on the Proposed Amendment
    c. Final Amendment
    3. Disclosure About Business Strategy
    a. Proposed Amendments
    b. Comments on the Proposed Amendment
    c. Final Amendments
    B. Narrative Description of Business (Item 101(c))
    1. Revenue-Generating Activities, Products and/or Services, and 
Any Dependence on Revenue-Generating Activities, Key Products, 
Services, Product Families, or Customers, Including Governmental 
Customers
    a. Proposed Amendments and Comments
    b. Final Amendments
    2. Status of Development Efforts for New or Enhanced Products, 
Trends in Market Demand, and Competitive Conditions
    a. Proposed Amendments and Comments
    b. Final Amendments
    3. Resources Material to a Registrant's Business
    a. Raw Materials
    (ii) Comments on the Proposed Amendments
    (iii) Final Amendments
    b. The Duration and Effect of All Patents, Trademarks, Licenses, 
Franchises, and Concessions Held
    (i) Proposed Amendments
    (ii) Comments on the Proposed Amendments
    (iii) Final Amendment
    4. A Description of Any Material Portion of the Business That 
May Be Subject to Renegotiation of Profits or Termination of 
Contracts or Subcontracts at the Election of the Government
    a. Proposed Amendment and Comments
    b. Final Amendment
    5. The Extent to Which the Business Is or May Be Seasonal
    a. Proposed Amendment and Comments
    b. Final Amendment
    6. Compliance With Material Government Regulations, Including 
Environmental Regulations
    a. Proposed Amendment
    b. Comments on the Proposed Amendment
    c. Final Amendment
    7. Human Capital Disclosure
    a. Proposed Amendment
    b. Comments on the Proposed Amendment
    c. Final Amendment
    C. Legal Proceedings (Item 103)
    1. Expressly Provide for the Use of Hyperlinks or Cross-
References To Avoid Repetitive Disclosure
    a. Proposed Amendment
    b. Comments on the Proposed Amendment
    c. Final Amendment
    2. Updated Disclosure Threshold for Environmental Proceedings in 
Which the Government Is a Party
    a. Proposed Amendments
    c. Final Amendment
    D. Risk Factors (Item 105)
    1. Summary Risk Factor Disclosure if the Risk Factor Section 
Exceeds 15 Pages
    a. Proposed Amendment
    b. Comments on the Proposed Amendment
    c. Final Amendment
    2. Replace the Requirement To Disclose the ``Most Significant'' 
Factors With the ``Material'' Factors
    a. Proposed Amendment
    b. Comments on the Proposed Amendment
    c. Final Amendment
    3. Require Registrants To Organize Risk Factors Under Relevant 
Headings
    a. Proposed Amendment
    b. Comments on the Proposed Amendment
    c. Final Amendment
III. Other Matters
IV. Economic Analysis
    A. Baseline and Affected Parties
    B. Potential Costs and Benefits
    C. Anticipated Effects on Efficiency, Competition, and Capital 
Formation
    D. Alternatives
V. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Summary of Comment Letters
    C. Summary of the Impact on Collections of Information
    D. Burden and Cost Estimates of the Amendments
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority

I. Introduction and Background

    On August 8, 2019, the Commission proposed amendments to modernize 
the description of business (Item 101), legal proceedings (Item 103), 
and risk factor (Item 105) disclosure requirements in Regulation S-
K.\3\ The proposals were intended to improve these disclosures

[[Page 63727]]

for investors and to simplify compliance for registrants.\4\
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    \3\ See Modernization of Regulation S-K Items 101, 103, and 105, 
Release No. 33-10668 (Aug. 8, 2019) [84 FR 44358 (Aug. 23, 2019)] 
(``Proposing Release'').
    \4\ The proposals were also consistent with and further promoted 
the objectives of the Fixing America's Surface Transportation Act 
(``FAST Act''). See Public Law 114-94, 129 Stat. 1312 (Dec. 4, 2015) 
(requiring, among other things, that the SEC conduct a study, issue 
a report, and issue a proposed rule on the modernization and 
simplification of Regulation S-K).
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    Pursuant to Section 108 of the Jumpstart Our Business Startups Act 
(``JOBS Act''),\5\ the Commission staff prepared the Report on Review 
of Disclosure Requirements in Regulation S-K (``S-K Study''),\6\ which 
recommended that the Commission conduct a comprehensive evaluation of 
its disclosure requirements. Based on the S-K Study's recommendation, 
the staff initiated an evaluation of the information our rules require 
registrants to disclose, how this information is presented, where this 
information is disclosed, and how we can better leverage technology as 
part of these efforts (collectively, the ``Disclosure Effectiveness 
Initiative'').\7\ The overall objective of the Disclosure Effectiveness 
Initiative was to improve our disclosure regime for both investors and 
registrants.
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    \5\ Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). Section 
108 of the JOBS Act required the Commission to conduct a review of 
Regulation S-K to determine how such requirements can be updated to 
modernize and simplify the registration process for emerging growth 
companies.
    \6\ See Report on Review of Disclosure Requirements in 
Regulation S-K (Dec. 2013), available at https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf (``S-K 
Study'').
    \7\ See SEC Spotlight on Disclosure Effectiveness, available at 
https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
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    In connection with the S-K Study and the launch of the Disclosure 
Effectiveness Initiative, the Commission staff invited public input on 
how to improve registrant disclosures.\8\ In a separate Concept Release 
issued in 2016,\9\ the Commission staff revisited the business and 
financial disclosure requirements in Regulation S-K and requested 
public comment on whether these requirements provide the information 
that investors need to make informed investment and voting decisions, 
and whether any of our rules have become outdated or unnecessary.
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    \8\ To facilitate public input on the Disclosure Effectiveness 
Initiative, the Commission invited members of the public to submit 
comments. See Request for Public Comment, available at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml. Public 
comments received in response to that request for comment are 
available on our website. See Comments on Disclosure Effectiveness, 
available at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
    \9\ See Business and Financial Disclosure Required by Regulation 
S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 
2016)] (``Concept Release'').
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    In developing the proposed amendments to Items 101, 103, and 105 of 
Regulation S-K, we considered input from comment letters we received in 
response to these disclosure modernization efforts. We also took into 
account the staff's experience with Regulation S-K arising from the 
Division of Corporation Finance's disclosure review program and changes 
in the regulatory and business landscape since the adoption of 
Regulation S-K. As a recent example, in response to the COVID-19 
pandemic, the Division of Corporation Finance closely monitored 
registrants' disclosure about how COVID-19 affected their financial 
condition and results of operations. Division staff observed that our 
principles-based disclosure requirements generally elicited detailed 
discussions of the impact of COVID-19 on registrants' liquidity 
position, operational constraints, funding sources, supply chain and 
distribution challenges, the health and safety of workers and 
customers, and other registrant- and sector-specific matters.\10\
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    \10\ See Division of Corporation Finance CF Disclosure Guidance: 
Topic No. 9A (June 23, 2020) (encouraging companies to evaluate the 
current and expected impact of COVID-19 through the eyes of 
management and to proactively revise and update disclosures, 
including MD&A, as facts and circumstances change), available at 
https://www.sec.gov/corpfin/covid-19-disclosure-considerations.
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    We also considered the many changes that have occurred in our 
capital markets and the domestic and global economy in the more than 30 
years since the adoption of these disclosure requirements, including 
changes in the mix of businesses that participate in our public 
markets, changes in the way businesses operate, changes in technology 
(in particular technology that facilitates the provision of, and access 
to, information), and other changes that have occurred simply with the 
passage of time. Many of the amendments reflect our long-standing 
commitment to a principles-based, registrant-specific approach to 
disclosure. Our disclosure requirements, while prescriptive in some 
respects, are rooted in materiality and facilitate an understanding of 
a registrant's business, financial condition and prospects through the 
lens through which management and the board of directors manage and 
assess the performance of the registrant. We believe that modernizing 
Items 101, 103, and 105 will result in improved disclosure, tailored to 
reflect registrants' particular circumstances, and reduce disclosure 
costs and burdens.
    In response to the proposed amendments, we received numerous 
comment letters, which we discuss in context below.\11\ In general, 
commenters supported some or all of the proposed amendments, although 
many suggested modifications to, and expansions of, the proposals. In 
some cases, commenters opposed one or more of the proposed amendments, 
or aspects of them. After considering all of the public comments 
received, we are adopting the amendments substantially as proposed with 
certain modifications. The table below briefly summarizes the final 
amendments: \12\
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    \11\ The public comments we received are available at https://www.sec.gov/comments/s7-11-19/s71119.htm. Unless otherwise 
indicated, the comment letters cited herein are those received in 
response to the Proposing Release.
    \12\ The final amendments to Items 101 and 103 will affect only 
domestic registrants and ``foreign private issuers'' that have 
elected to file on domestic forms subject to Regulation S-K 
disclosure requirements. Regulation S-K does not apply to foreign 
private issuers unless a form reserved for foreign private issuers 
(such as Securities Act Form F-1, F-3, or F-4) specifically refers 
to Regulation S-K. Form 20-F is the combined registration statement 
and annual report form used by foreign private issuers under the 
Exchange Act. It also sets forth certain disclosure requirements for 
registration statements filed by foreign private issuers under the 
Securities Act. Instead of Items 101 and 103, the foreign private 
issuer forms refer to Part I, Item 4 and Item 8.A.7., respectively, 
of Form 20-F. In contrast, the amendment to Item 105 will affect 
both domestic and foreign registrants because Forms F-1, F-3, and F-
4, like their domestic counterparts, all refer to that Item. See, 
e.g., Item 3 of Form F-1. A foreign private issuer is any foreign 
issuer other than a foreign government, except for an issuer that 
(1) has more than 50% of its outstanding voting securities held of 
record by U.S. residents; and (2) any of the following: (i) A 
majority of its officers and directors are citizens or residents of 
the United States; (ii) more than 50% of its assets are located in 
the United States; or (iii) its business is principally administered 
in the United States. See Securities Act Rule 405 [17 CFR 230.405] 
and Exchange Act Rule 3b-4(c) [CFR 240.3b-4(c)].

[[Page 63728]]

------------------------------------------------------------------------
                               Summary of existing  Summary of the final
     Regulation S-K item        item requirements        amendments
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Item 101(a).................  Requires a            Revises Item 101(a)
                               description of the    to:
                               general development   Be largely
                               of the business of    principles-based,
                               the registrant        requiring
                               during the past       disclosure of
                               five years, or such   information
                               shorter period as     material to an
                               the registrant may    understanding of
                               have been engaged     the general
                               in business.          development of the
                                                     business, and
                                                     eliminating the
                                                     previously
                                                     prescribed five-
                                                     year timeframe.
                                                    Revises Item 101(h)
                                                     to:
                                                     Eliminate
                                                     the three-year
                                                     timeframe with
                                                     respect to smaller
                                                     reporting
                                                     companies.
                                                    Revises Items 101(a)
                                                     and (h) to clarify
                                                     that:
                                                    
                                                     Registrants, in
                                                     filings made after
                                                     a registrant's
                                                     initial filing, may
                                                     provide an update
                                                     of the general
                                                     development of the
                                                     business rather
                                                     than a full
                                                     discussion. The
                                                     update must
                                                     disclose all of the
                                                     material
                                                     developments that
                                                     have occurred since
                                                     the registrant's
                                                     most recent filing
                                                     containing a full
                                                     discussion of the
                                                     general development
                                                     of its business,
                                                     and incorporate by
                                                     reference that
                                                     prior discussion.
Item 101(c).................  Requires a narrative  Revises Item 101(c)
                               description of the    to:
                               business done and     Clarify and
                               intended to be done   expand the
                               by the registrant     principles-based
                               and its               approach of Item
                               subsidiaries,         101(c), with a non-
                               focusing upon the     exclusive list of
                               registrant's          disclosure topic
                               dominant segment or   examples (drawn in
                               each reportable       part from the
                               segment about which   topics currently
                               financial             contained in Item
                               information is        101(c));
                               presented in its      Include, as
                               financial             a disclosure topic,
                               statements. To the    a description of
                               extent material to    the registrant's
                               an understanding of   human capital
                               the registrant's      resources to the
                               business taken as a   extent such
                               whole, the            disclosures would
                               description of each   be material to an
                               such segment must     understanding of
                               include disclosure    the registrant's
                               of several specific   business; and
                               matters.
                                                     Refocus the
                                                     regulatory
                                                     compliance
                                                     disclosure
                                                     requirement by
                                                     including as a
                                                     topic all material
                                                     government
                                                     regulations, not
                                                     just environmental
                                                     laws.
Item 103....................  Requires disclosure   Revises Item 103 to:
                               of any material       Expressly
                               pending legal         state that the
                               proceedings           required
                               including the name    information may be
                               of the court or       provided by
                               agency in which the   hyperlink or cross-
                               proceedings are       reference to legal
                               pending, the date     proceedings
                               instituted, the       disclosure located
                               principal parties     elsewhere in the
                               thereto, a            document to avoid
                               description of the    duplicative
                               factual basis         disclosure; and
                               alleged to underlie   Implements
                               the proceeding and    a modified
                               the relief sought.    disclosure
                               Similar information   threshold that
                               is to be included     increases the
                               for any such          existing
                               proceedings known     quantitative
                               to be contemplated    threshold for
                               by governmental       disclosure of
                               authorities.          environmental
                              Contains a threshold   proceedings to
                               for disclosure        which the
                               based on a            government is a
                               specified dollar      party from $100,000
                               amount ($100,000)     to $300,000, but
                               for proceedings       that also affords a
                               related to Federal,   registrant the
                               State, or local       flexibility to
                               environmental         select a different
                               protection laws.      threshold that it
                                                     determines is
                                                     reasonably designed
                                                     to result in
                                                     disclosure of
                                                     material
                                                     environmental
                                                     proceedings,
                                                     provided that the
                                                     threshold does not
                                                     exceed the lesser
                                                     of $1 million or
                                                     one percent of the
                                                     current assets of
                                                     the registrant and
                                                     its subsidiaries on
                                                     a consolidated
                                                     basis.
Item 105....................  Requires disclosure   Revises Item 105 to:
                               of the most           Require
                               significant factors   summary risk factor
                               that make an          disclosure of no
                               investment in the     more than two pages
                               registrant or         if the risk factor
                               offering              section exceeds 15
                               speculative or        pages;
                               risky and specifies   Refine the
                               that the discussion   principles-based
                               should be concise,    approach of Item
                               organized             105 by requiring
                               logically, and        disclosure of
                               furnished in plain    ``material'' risk
                               English. The Item     factors; and
                               also states that      Require
                               registrants should    risk factors to be
                               set forth each risk   organized under
                               factor under a        relevant headings
                               subcaption that       in addition to the
                               adequately            subcaptions
                               describes the risk.   currently required,
                               Additionally, Item    with any risk
                               105 directs           factors that may
                               registrants to        generally apply to
                               explain how each      an investment in
                               risk affects the      securities
                               registrant or the     disclosed at the
                               securities being      end of the risk
                               offered and           factor section
                               discourages           under a separate
                               disclosure of risks   caption.
                               that could apply to
                               any registrant.
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    We discuss our revisions with respect to the proposed amendments in 
more detail below.

II. Discussion of the Amendments

A. General Development of Business (Item 101(a))

    Item 101(a) of Regulation S-K currently requires a description of 
the general development of the business of the registrant during the 
past five years, or such shorter period as the registrant may have been 
engaged in business. In describing the general development of the 
business, Item 101(a)(1) requires disclosure of the following:
     The year in which the registrant was organized and its 
form of organization;
     The nature and results of any bankruptcy, receivership or 
similar proceedings with respect to the registrant or any of its 
significant subsidiaries;
     The nature and results of any other material 
reclassification, merger or consolidation of the registrant or any of 
its significant subsidiaries;
     The acquisition or disposition of any material amount of 
assets otherwise than in the ordinary course of business; and
     Any material changes in the mode of conducting the 
business.
    The Concept Release solicited input on whether the disclosure 
provided under this Item continues to be useful

[[Page 63729]]

and how this Item might be improved.\13\ A number of commenters on the 
Concept Release recommended eliminating or streamlining the 
requirements in Item 101(a).\14\ Several of these commenters 
recommended limiting Item 101(a) disclosure to material 
developments,\15\ and a few commenters supported executive summaries 
and layering techniques for the business section.\16\
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    \13\ See Concept Release, supra note 9, at 23932.
    \14\ See Proposing Release, supra note 3, at 44361.
    \15\ See id.
    \16\ See id.
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    In light of this feedback, we proposed to amend Item 101(a)(1) to 
make it more principles-based and to provide registrants more 
flexibility to tailor disclosures to their unique circumstances. We 
discuss the proposals and our revisions with respect to the final 
amendments below.
1. Elimination of the Five-Year and the Three-Year Disclosure 
Timeframes
a. Proposed Amendments
    Item 101(a) requires a description of the general development of 
the registrant's business during the past five years, or such shorter 
period as the registrant may have engaged in business. Item 101(a) also 
requires information to be disclosed for earlier periods if material to 
an understanding of the general development of the business. A 
requirement to provide a brief outline of the general development of 
the business for the preceding five years was included in the earliest 
form requirements for registration statements and annual reports.\17\ 
The first version of Regulation S-K, adopted in 1977, included a 
requirement to describe the development of the registrant's business 
during the prior five years, or such shorter period as the registrant 
may have been in business.\18\
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    \17\ See, e.g., Item 6 of Form A-2 adopted in 1935, which 
required registrants to outline briefly ``the general development of 
the business for the preceding five years.'' See Release No. 33-276 
(Jan. 14, 1935) [not published in the Federal Register]. 
Additionally, Item 5 of Form A-1, adopted in 1933, required 
registrants to briefly describe the length of time the registrant 
had been engaged in its business. See Release No. 33-5 (July 6, 
1933) [not published in the Federal Register]. See also S-K Study, 
supra note 6 at 32, n. 88.
    \18\ See Adoption of Disclosure Regulation and Amendments of 
Disclosure Forms and Rules, Release No. 33-5893 (Dec. 23, 1977) [42 
FR 65554 (Dec. 30, 1977)].
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    Item 101(h) sets forth alternative disclosure standards for smaller 
reporting companies that allow these registrants to, among other 
things, provide a less detailed description of the registrant's 
business than is required under Item 101(a).\19\ In addition, Item 
101(h) requires a description of three years rather than five years of 
development of a smaller reporting company's business.
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    \19\ The term ``smaller reporting company'' is defined in 17 CFR 
230.405 and 17 CFR 240.12b-2 as an issuer that is not an investment 
company, an asset-backed issuer (as defined in 17 CFR 229.1101), or 
a majority-owned subsidiary of a parent that is not a smaller 
reporting company and that had a public float of less than $250 
million; or had annual revenues of less than $100 million, and 
either no public float, or a public float of less than $700 million.
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    We proposed to amend Item 101(a) to eliminate the five-year 
disclosure timeframe and to apply a materiality standard to all of a 
registrant's disclosure of the general development of its business. In 
addition, we proposed a corresponding amendment to Item 101(h) to 
eliminate the three-year disclosure timeframe applicable to smaller 
reporting companies.\20\
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    \20\ The proposed amendment to Item 101(h), however, retained 
the requirement that if a smaller reporting company has not been in 
business for three years, it must provide the same information for 
its predecessors if there are any.
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b. Comments on the Proposed Amendments
    A number of commenters expressed general support for eliminating 
the five-year disclosure timeframe.\21\ Several commenters stated that 
a prescribed disclosure timeframe does not elicit the most relevant 
disclosure.\22\ One of these commenters stated that the one-size-fits-
all, fixed time period under the current rule may discourage 
registrants from providing relevant disclosure relating to periods 
outside of the five-year timeframe or result in an inadequate 
discussion of meaningful recent developments.\23\
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    \21\ See, e.g., letters from International Bancshares 
Corporation (``IBC''), California Lawyers Association (``CLA''), 
Ernst & Young LLP (``E&Y''), Edison Electric Institute and American 
Gas Association Accounting Advisory Council (``EEI and AGA''), 
Society for Corporate Governance (``Society''), British Columbia 
Investment Management Corporation (``BCI''), Davis Polk & Wardwell 
(``DP&W''), Nareit, U.S. Chamber of Commerce's Center for Capital 
Markets Competitiveness (``CCMC''), FedEx Corporation (``FedEx''), 
and General Motors Company (``GM'').
    \22\ See, e.g., letters from GM, Society, EEI and AGA, CLA, and 
IBC.
    \23\ See letter from GM.
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    Several commenters opposed eliminating the five-year disclosure 
timeframe.\24\ One of these commenters stated that the proposal 
complicates an area where there are no existing reporting problems.\25\ 
Another commenter stated that the current five-year timeframe is 
appropriate because it corresponds with other financial reporting 
requirements in Regulation S-K that have similar five-year disclosure 
timeframes, such as the selected financial data required by Item 
301.\26\ A different commenter stated that, without a prescribed 
timeframe, some registrants might consider it necessary to include 
information from decades past, which could significantly increase the 
amount of disclosure with minimal added value to users.\27\ This 
commenter recommended that we retain the five-year timeframe and 
emphasize that only material developments be disclosed.
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    \24\ See, e.g., letters from Financial Executives International 
(``FEI''), CFA Institute, and California Public Employees' 
Retirement System (``CalPERS'').
    \25\ See letter from CalPERS (stating that under the proposal, a 
registrant could choose to disclose a bankruptcy for only two years 
rather than for five years as required under the current timeframe).
    \26\ See letter from CFA Institute. Item 301 of Regulation S-K 
[17 CFR 229.301] requires registrants to furnish selected financial 
data in comparative tabular form for each of the registrant's last 
five fiscal years and any additional fiscal years necessary to keep 
the information from being misleading. We have recently proposed 
amendments to eliminate this requirement. See infra note 32 and 
accompanying text.
    \27\ See letter from FEI.
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    We received a few comments on the proposed elimination of the 
three-year timeframe in Item 101(h).\28\ One commenter supported 
eliminating the three-year timeframe.\29\ This commenter stated that 
investors are generally better able to make informed investment 
decisions when the disclosure requirements provide a basis for 
comparison, but noted that smaller reporting companies are by their 
nature much less comparable to other companies. Another commenter 
indicated that the Commission should retain the current requirement to 
provide business development disclosure for predecessors, if any, of 
the smaller reporting company if the smaller reporting company has not 
been in business for three years.\30\
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    \28\ See, e.g., letters from CLA and CFA Institute.
    \29\ See letter from CLA.
    \30\ See letter from CFA Institute.
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c. Final Amendments
    After considering the comments, we are adopting the amendments to 
Item 101(a) and Item 101(h) as proposed, but with a minor change to the 
rule text of Item 101(h) for clarity. The amendment to Item 101(a) will 
focus registrants on information material to an understanding of the 
development of their business, irrespective of a specific timeframe. 
Similarly, the amendment to Item 101(h) will eliminate the provision 
that requires smaller reporting companies to describe the development 
of their business during the last three years, and will direct smaller 
reporting companies, in describing the development of their business, 
to provide information for the period of

[[Page 63730]]

time that is material to an understanding of the general development of 
the business.
    While we have considered commenter concerns about eliminating a 
fixed timeframe for the description of a registrant's business, we 
continue to believe that the current timeframes of five years and three 
years, respectively, may not always elicit the most relevant 
disclosure. With respect to one commenter's belief that the five-year 
time period should be retained because it corresponds to other 
disclosure requirements, we do not think that elimination of the 
specified period will result in the loss of an important correlation 
with other disclosure requirements.\31\ We believe the final amendments 
will improve disclosure by affording registrants additional flexibility 
to tailor their disclosure and provide information material to an 
understanding of their business. Some registrants may prefer to 
describe the development of their business over a longer period in 
order to provide the information that may be material to an investment 
or voting decision, while others may conclude that the material aspects 
of their business development can be described over a shorter 
timeframe. Moreover, we believe the benefits of more tailored and 
effective disclosure in this context would justify any corresponding 
loss in comparability.
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    \31\ As noted above, the Commission recently proposed to 
eliminate Item 301 of Regulation S-K, which requires disclosure of 
five years of selected financial data, because the information 
required by that item is largely duplicative of other requirements. 
See Commission Guidance on Management's Discussion and Analysis, 
Selected Financial Data, and Supplementary Financial Information, 
Release No. 33-10750 (Jan. 30, 2020) [85 FR 12068 (Feb. 28, 2020)] 
(``MD&A Release'').
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2. Updated Disclosure in Subsequent Filings
a. Proposed Amendments
    Currently, registrants are required to provide disclosure regarding 
the general development of the business in certain registration 
statements and annual reports. For filings made after a registrant's 
initial filing, we proposed to amend Item 101(a)(2) and Item 101(h) to 
permit a registrant to provide only an update of its business 
development disclosure with a focus on material developments, if any, 
in the reporting period. In addition, the proposed amendments would 
require a registrant that is using this provision to incorporate by 
reference a discussion of the general development of the registrant's 
business that, together with the update, would contain the full 
discussion. The registrant would be required to incorporate the prior 
discussion by reference using one active hyperlink to the registrant's 
most recent filing containing that discussion.\32\ Under this approach, 
a reader would have access to a full discussion by reviewing the 
updated business development disclosure and the disclosure from the 
previous filing that is incorporated by reference. Alternatively, a 
registrant could elect to provide a complete discussion of its business 
development, including any material updates, in which case, it would 
not need to incorporate by reference business development disclosure 
from a previous filing.
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    \32\ Pursuant to Securities Act Rule 411 [17 CFR 230.411] and 
Exchange Act Rule 12b-23 [17 CFR 240.12b-23], registrants must, in 
most cases, include an active hyperlink to information incorporated 
by reference.
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b. Comments on the Proposed Amendment
    A number of commenters generally supported permitting the use of 
incorporation by reference, and hyperlinking to the most recently filed 
full discussion of the general development of the registrant's 
business.\33\ One of these commenters stated that this would result in 
a more organized and efficient picture of the registrant's business for 
the investing public.\34\ Some of these commenters, while supportive of 
the proposal, did not support mandating the proposed method to present 
updated Item 101(a)(1) disclosure, as this method might not always be 
useful to investors.\35\ These commenters stated that when registrants 
have frequent material updates (e.g., multiple significant 
acquisitions), including the full disclosure of the general development 
of the business in each filing (or every few filings) may be the most 
effective way to provide appropriate information to investors in a 
format that is easy for them to understand.
---------------------------------------------------------------------------

    \33\ See, e.g., letters from Council of Institutional Investors 
(``CII''), Jeff LaBerge (``LaBerge''), E&Y, FEI, William F. Dunker 
(``Dunker''), BCI, DP&W, CCMC, Nareit, and FedEx.
    \34\ See letter from Dunker.
    \35\ See letter from EEI and AGA.
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    A number of commenters opposed the proposal to allow registrants to 
provide an update of material developments during the reporting period 
and require a hyperlink to the full discussion of the general 
development of the registrant's business disclosure, because they 
stated that this approach could lead to a disjointed narrative that 
would not be user-friendly.\36\ One commenter stated the approach would 
not reduce burdens on registrants as the prior period disclosure has 
already been prepared.\37\ Several other commenters expressed concern 
that the term ``reporting period'' limited the period of time over 
which a registrant could provide an update about material 
developments.\38\
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    \36\ See, e.g., letters from Chevron Corporation (``Chevron''), 
CLA, GM, CFA Institute, New York City Bar Association (``NYC Bar 
Association''), and International Corporate Governance Network 
(``ICGN'').
    \37\ See letter from GM.
    \38\ See, e.g., letters from CLA, E&Y and CalPERS.
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    We also received comments recommending that the proposal should not 
mandate the use of a single hyperlink reference.\39\ These commenters 
stated that if there are multiple updates in more than one reporting 
period, registrants should be allowed to incorporate by reference and 
hyperlink to all relevant filings to provide a full discussion of the 
general development of the business.
---------------------------------------------------------------------------

    \39\ See letter from EEI and AGA.
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c. Final Amendment
    After considering the comments, we are adopting the amendments to 
Item 101(a)(2) and Item 101(h) substantially as proposed, but with 
clarifications.\40\ Under the final amendments, for filings subsequent 
to its initial registration statement, a registrant may provide an 
update of the general development of its business disclosing all of the 
material developments that have occurred, if any, since the most recent 
full discussion of the general development of its business disclosed in 
a previously filed registration statement or report. If a registrant 
chooses this approach, it must incorporate by reference the most recent 
full discussion of the general development of the registrant's 
business. Moreover, under the final amendments, registrants are only 
permitted to incorporate the full discussion of the general development 
of its business from a single previously filed document. If a 
registrant does not choose this approach, it must provide a complete 
discussion of its business development, including any material updates 
in each filing. In this regard, the approach that we are adopting is 
more restrictive than existing incorporation by reference requirements 
that, subject to certain limits, allow registrants to provide 
disclosure by incorporating by

[[Page 63731]]

reference some or all of it from more than one previously filed 
document.\41\
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    \40\ We are also adopting corresponding amendments to Item 
101(h) to permit a smaller reporting company, for filings other than 
initial registration statements, to provide an update to the general 
development of the business disclosure, instead of a full 
discussion, that complies with Item 101(a), including the hyperlink 
option.
    \41\ Securities Act Rule 411(e) and Exchange Act 12b-23(e), 
however, provide that information must not be incorporated by 
reference in any case where such incorporation would render the 
disclosure incomplete, unclear, or confusing, such as incorporating 
by reference from a second document if that second document 
incorporates information pertinent to such disclosure by reference 
to a third document. We remind registrants that, consequently, a 
filing that includes an update and incorporates by reference the 
more complete Item 101(a) discussion could not be incorporated by 
reference into a subsequent filing, such as a Form S-3 or Form S-4.
---------------------------------------------------------------------------

    In response to the concerns expressed by some commenters that the 
proposal should not be mandatory,\42\ we have added language to the 
final amendment to clarify that the revision to Item 101(a)(2) provides 
an optional method for updating general business development disclosure 
using incorporation by reference to one document. In addition, based on 
comments received expressing concerns that the term ``reporting 
period'' limited the period of time over which a registrant could 
provide an update about material developments,\43\ the final amendments 
clarify that registrants using the update option must disclose all of 
the material developments that have occurred since the most recent full 
discussion of the general development of its business disclosed in a 
previously filed registration statement or report.
---------------------------------------------------------------------------

    \42\ See, e.g., letters from EEI and AGA.
    \43\ See, e.g., letters from CLA, E&Y and CalPERS.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the repetition of Item 101(a) 
disclosure in successive filings may obscure important developments in 
a registrant's business. To the extent that registrants present and 
update their Item 101(a) disclosure under this method, we believe that 
the final amendments will help focus investor attention on material 
developments in a registrant's business.
3. Disclosure About Business Strategy
a. Proposed Amendments
    We proposed amending the existing prescribed disclosure topics in 
Item 101(a)(1) to make them more principles-based. The proposed 
amendments would replace the list of prescribed disclosure topics with 
a non-exclusive list of the types of information that a registrant may 
need to disclose. The proposed amendments would also clarify that 
disclosure of a topic would be required only to the extent such 
information is material to an understanding of the general development 
of a registrant's business. As proposed, amended Item 101(a)(1) no 
longer would include disclosure of the year that the registrant was 
organized and its form of organization, or disclosure of any material 
changes in the mode of conducting the registrant's business in its list 
of disclosure topics. Nevertheless, such disclosure would continue to 
be required if material to an understanding of the general development 
of the registrant's business. In addition, we also proposed to include 
a new disclosure topic that would require, if material to an 
understanding of the general development of the business, disclosure of 
transactions and events that affect or may affect the company's 
operations, including material changes to a registrant's previously 
disclosed business strategy. We noted that such disclosure may be 
material to investors and many registrants currently include it in 
their initial registration statements.
b. Comments on the Proposed Amendment
    Many commenters expressed general support for moving to a more 
principles-based approach to disclosure about the development of a 
registrant's business.\44\ Several commenters stated that a more 
principles-based approach would reduce the disclosure of immaterial 
information and give registrants the flexibility to focus on 
information that is material and unique to the registrant.\45\ Several 
commenters, however, opposed the more principles-based approach under 
the proposals.\46\
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    \44\ See, e.g., letters from CII, Nasdaq, LaBerge, EEI and AGA, 
Society, BCI, Dunker, DP&W, Nareit, CCMC, FedEx, FEI, and the Humane 
Society of the United States (``Humane Society'').
    \45\ See, e.g., letters from Society, Nasdaq, Dunker, DP&W, and 
FEI.
    \46\ See, e.g., letters from Public Citizen, AFL-CIO (principle-
based approach would increase the reliance on the subjective 
judgment of management), Better Markets, Domini Impact Investments 
LLC (``Domini'') (principles-based approach could reduce the 
usefulness of corporate disclosures for investors), Principles for 
Responsible Investment (``PRI''), Breckinridge Capital Advisors 
(``Breckinridge''), ICGN, and letters from individuals and entities 
using Letter Type A.
---------------------------------------------------------------------------

    A number of commenters expressed support for including ``material 
changes to a registrant's previously disclosed business strategy'' as a 
non-exclusive disclosure example.\47\ One commenter viewed the 
strategic orientation of a company as material to investors and 
suggested that changes to it should be disclosed to investors on a 
continuing basis.\48\ Several other commenters stated that disclosure 
of a registrant's business strategy, not just changes to previously 
disclosed business strategy, should be required for all 
registrants.\49\ Another commenter expressed concern that limiting the 
requirement to disclose only material changes in business strategy 
would reduce the amount of business strategy information that companies 
are currently providing annually to their investors.\50\ This commenter 
recommended that the Commission require annual disclosure of a 
company's business strategy. Another commenter who expressed support 
for requiring disclosure of material changes to a previously disclosed 
business strategy stated that the rules should not mandate disclosure 
of business strategy because it could cause some registrants to 
disclose competitive or sensitive forward-looking information.\51\ To 
help mitigate this risk, this commenter recommended that a safe harbor 
provision be added to the amendment.
---------------------------------------------------------------------------

    \47\ See, e.g., letters from CII, BCI, CCMC, FedEx, American 
Federation of Labor and Congress of Industrial Organizations (``AFL-
CIO''), FEI, CFA Institute, and CalPERS.
    \48\ See letter from BCI.
    \49\ See, e.g., letters from AFL-CIO and CFA Institute. See also 
letter from CalPERS (suggesting that the rule should make ``clear 
that material changes in business strategy would not have to be 
disclosed prospectively'').
    \50\ See letter from AFL-CIO.
    \51\ See letter from FEI.
---------------------------------------------------------------------------

    Several commenters opposed including transactions and events that 
affect or may affect the company's operations and material changes to a 
registrant's previously disclosed business strategy as non-exclusive 
disclosure topics.\52\ Some of these commenters stated that disclosure 
of material changes to a registrant's previously disclosed business 
strategy is unnecessary and duplicative because disclosure regarding 
changes in business strategy would already be reflected in the 
MD&A.\53\ Other commenters stated that to the extent any change would 
constitute a known trend or uncertainty likely to cause the most recent 
financial results not to be indicative of future results, Item 303 of 
Regulation S-K already requires such disclosure.\54\ Some commenters 
that opposed this disclosure topic also stated that the disclosure 
standard in the proposed amendment was different from the disclosure 
standard under the MD&A requirements, which provides for disclosure of 
information that a registrant ``reasonably expects will have a material 
favorable or unfavorable impact on net sales or revenues or income from 
continuing operations.'' \55\ These commenters recommended that, if the 
proposed amendment were

[[Page 63732]]

adopted, the amendment should be revised to harmonize its standard with 
the MD&A disclosure standard.
---------------------------------------------------------------------------

    \52\ See, e.g., letters from UnitedHealth Group Incorporated 
(``UnitedHealth Group''), Dunker, Society, DP&W, Chevron, and GM.
    \53\ See, e.g., letters from UnitedHealth Group, Society, DP&W, 
Chevron, and GM.
    \54\ See, e.g., letters from DP&W, Chevron, and GM.
    \55\ See, e.g., letters from Society and GM.
---------------------------------------------------------------------------

    Another commenter noted that, absent a definition of the term 
``business strategy,'' it would be difficult for registrants to 
determine whether disclosure is warranted.\56\ Another commenter stated 
that there is a broad range in the interpretation of what ``strategy'' 
means and that the amendment would not result in disclosures that would 
enable investors to make meaningful comparisons among companies, even 
among companies within the same industry.\57\
---------------------------------------------------------------------------

    \56\ See letter from CLA.
    \57\ See letter from Chevron.
---------------------------------------------------------------------------

    Several commenters expressed concern that the proposal would 
require registrants to disclose sensitive proprietary or business 
information regarding a registrant's business strategy.\58\ One of 
these commenters recommended that, if adopted, the Commission should 
clarify that disclosure of proprietary or competitively sensitive 
information is not required.\59\
---------------------------------------------------------------------------

    \58\ See, e.g., letters from UnitedHealth Group, Dunker, 
Society, DP&W, and GM.
    \59\ See letter from GM.
---------------------------------------------------------------------------

    Several commenters stated that the proposal could result in 
disparate treatment between registrants that provide disclosure of 
their business strategy and therefore would be required to disclose any 
material changes to their strategy, and registrants that have not 
previously provided disclosure of their business strategy.\60\ One of 
these commenters stated that a requirement to provide disclosure of any 
material change in business strategy could become a deterrent to 
companies considering conducting an initial public offering.\61\
---------------------------------------------------------------------------

    \60\ See, e.g., letters from UnitedHealth Group, Dunker, and 
Society.
    \61\ See letter from Society.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting the amendments to Item 101(a)(1) largely as 
proposed, but with several modifications in response to comments 
received. As proposed, the final amendments retain the existing 
disclosure topics addressing the results of any bankruptcy, 
receivership, or similar proceedings; the nature and results of any 
other material reclassification, merger, or consolidation of the 
registrant or any of its significant subsidiaries; and the acquisition 
or disposition of any material amount of assets otherwise than in the 
ordinary course of business.\62\
---------------------------------------------------------------------------

    \62\ The language of the disclosure topic regarding the results 
of any bankruptcy, receivership or similar proceedings differs 
slightly from the proposal by calling for disclosure of the ``nature 
and effects of any material bankruptcy, receivership, or any similar 
proceeding with respect to the registrant or any of its significant 
subsidiaries.'' The proposed rule text did not include the 
italicized language. Because the introductory text to Item 101(a)(1) 
indicates that the disclosure should be provided with respect to the 
registrant and its subsidiaries, we are making it explicit that Item 
101(a)(1)(ii) disclosure should be provided with respect to 
registrants and their significant subsidiaries.
---------------------------------------------------------------------------

    We are revising the disclosure topic regarding transactions and 
events that affect or may affect the company's operations, including 
material changes to a registrant's previously disclosed business 
strategy, to eliminate the requirement to disclose transactions and 
events that affect or may affect the company's operations. We were 
persuaded by the commenter who stated that this disclosure would be 
required under Item 303 of Regulation S-K.\63\ We agree that the 
proposed disclosure requirement could result in repetitive disclosures, 
which would be contrary to one of our objectives in amending Item 
101(a). However, we are adopting as a disclosure topic material changes 
to a registrant's previously disclosed business strategy. While some 
commenters indicated that the proposal could result in disparate 
treatment between registrants that currently provide disclosure of 
their business strategy and those that do not,\64\ we believe that once 
a registrant has disclosed its business strategy, it is appropriate for 
it to discuss changes to that strategy, to the extent material to an 
understanding of the development of the registrant's business. As noted 
by one commenter, many registrants currently tailor their responses 
under existing Item 101(a) to provide disclosure regarding their 
business strategy, although this disclosure is not specifically 
required.\65\ The final amendments build on these practices. We 
emphasize, however, that the principles-based approach of the final 
amendments will provide registrants with the flexibility to determine 
the appropriate level of detail for these disclosures and should 
mitigate any disincentives the amendments create for registrants to 
disclose their business strategy. We are also not adopting a definition 
of the term ``business strategy,'' as suggested by one commenter,\66\ 
to provide registrants with the flexibility to tailor their disclosures 
according to their facts and circumstances.
---------------------------------------------------------------------------

    \63\ See letter from Chevron.
    \64\ See, e.g., letters from UnitedHealth Group, Dunker, and 
Society.
    \65\ See letter from AFL-CIO.
    \66\ See letter from CLA.
---------------------------------------------------------------------------

    We are not adding a requirement to disclose a company's business 
strategy annually, contrary to the suggestion of a commenter.\67\ Given 
that the final amendments are intended to make Item 101(a) more 
principles-based and require disclosure only to the extent material to 
an understanding of a registrant's business, we believe that requiring 
annual disclosure of a company's business strategy would be 
inconsistent with these goals.
---------------------------------------------------------------------------

    \67\ See letter from AFL-CIO.
---------------------------------------------------------------------------

    In addition, we are not adopting a safe harbor to address the 
concern of disclosing competitive or sensitive forward-looking 
information, as recommended by one commenter. We believe the 
principles-based nature of the final amendments to Item 101(a)(1) will 
provide registrants with considerable flexibility to tailor their 
disclosures to avoid disclosing competitively harmful information while 
still providing material information to investors. In addition, the 
amendments do not alter the application of existing statutory safe 
harbor provisions of the Private Securities Litigation Reform Act 
(``PSLRA'') that would be available for forward-looking statements made 
by registrants.\68\ We therefore do not believe a new safe harbor is 
necessary.
---------------------------------------------------------------------------

    \68\ [thinsp]See Section 27A of the Securities Act [15 U.S.C. 
77z-2 (b)] and Section 21E of the Exchange Act [15 U.S.C. 78u-5(b)].
---------------------------------------------------------------------------

B. Narrative Description of Business (Item 101(c))

    Item 101(c) requires a narrative description of the business done 
and intended to be done by the registrant and its subsidiaries, 
focusing upon the registrant's dominant segment or each reportable 
segment about which financial information is presented in the financial 
statements. To the extent material to an understanding of the 
registrant's business taken as a whole, the description of each such 
segment must include ten specific items listed in Item 101(c) (see 
Items (1)-(10) in the list below). Item 101(c) specifies two other 
items that must be discussed with respect to the registrant's business 
in general (see Items (11)-(12) in the list below), although, where 
material, the registrant must also identify the segments to which those 
matters are significant. Item 101(c) requires disclosure of: \69\
---------------------------------------------------------------------------

    \69\ Item 101(c)(1) [17 CFR 229.101(c)(1)] specifies that, to 
the extent material to an understanding of the registrant's business 
taken as a whole, the description of each segment must include the 
information specified in paragraphs (c)(i) through (x). Information 
in paragraphs (c)(xi) through (xiii) is required to be discussed for 
the registrant's business in general and, when material, the 
segments to which these matters are significant also must be 
identified.

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[[Page 63733]]

    (1) Principal products produced and services rendered;
    (2) New products or segments;
    (3) Sources and availability of raw materials;
    (4) Intellectual property;
    (5) Seasonality of the business;
    (6) Working capital practices;
    (7) Dependence on certain customers;
    (8) Dollar amount of backlog orders believed to be firm;
    (9) Business subject to renegotiation or termination of government 
contracts;
    (10) Competitive conditions;
    (11) The material effects of compliance with environmental laws; 
and
    (12) Number of persons employed.\70\
---------------------------------------------------------------------------

    \70\ The Commission removed and reserved Item 101(c)(1)(xi), 
which required disclosure of company- and customer-sponsored 
research and development activities, largely because U.S. GAAP 
requires similar, but broader, disclosure. See Disclosure Update and 
Simplification Final Rule, Release No. 33-10532 (Aug. 17, 2018) [83 
FR 50148 (Oct. 4, 2018) (``DUSTR Adopting Release''). Thus, there 
currently are twelve enumerated disclosure items under Item 101(c).
---------------------------------------------------------------------------

    Many of the enumerated disclosure requirements in Item 101(c) were 
adopted in 1973.\71\ As businesses, markets, and technology have 
changed since that time, some of the prescribed disclosure topics in 
Item 101(c) are not relevant to all registrants, and these disclosure 
requirements may elicit disclosure that is not material to a particular 
registrant. In the S-K Study, the staff recommended a review of these 
requirements in light of changes that have occurred in the way 
businesses operate.\72\ In addition, the Concept Release invited 
comment on whether Item 101(c) continues to provide useful information 
to investors and how the Item's requirements may be improved.\73\
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    \71\ See New Ventures, Meaningful Disclosure, Release No. 33-
5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)].
    \72\ See S-K Study, supra note 6, at 99-100.
    \73\ See Concept Release, supra note 9.
---------------------------------------------------------------------------

    To facilitate application of our principles-based revisions to Item 
101, we proposed to amend Item 101(c) to be more clearly principles-
based by replacing the current list of specific items with a non-
exclusive list of disclosure topic examples.\74\ In developing the 
proposal, we took into account the comments received on the Concept 
Release. For example, a number of commenters on the Concept Release 
stated that working capital practices might be better addressed in 
MD&A.\75\ Under the proposed amendments to Item 101(c), the revised 
rule would not explicitly reference the disclosure requirements under 
Item 101(c)(1)(vi) regarding disclosure of working capital practices, 
Item 101(c)(1)(ii) requirement regarding disclosure about new segments, 
or the Item 101(c)(1)(viii) dollar amount of backlog orders believed to 
be firm. Nevertheless, under the proposed principles-based approach, 
registrants would have to provide disclosure about these topics, as 
well as any other topics regarding their business, if they are material 
to an understanding of the business and not otherwise disclosed. For 
example, if supply chain finance arrangements used by a registrant are 
a significant part of its working capital practices, they may be 
material to understanding the nature of its commercial relationships. 
While MD&A disclosures on the topic are more focused on the potential 
material impact of such arrangements on the registrant's periodic cash 
flows and financial condition, the proposed principles-based approach 
would call for additional disclosure if material to an understanding of 
those commercial relationships. We discuss the proposals and our 
revisions with respect to the final amendments below.\76\
---------------------------------------------------------------------------

    \74\ We did not propose to amend the disclosure requirements for 
smaller reporting companies in Item 101(h)(1) through (6). We 
believe that this approach will continue to permit smaller reporting 
companies to provide a less detailed description of their business, 
consistent with the current scaled disclosure requirements for these 
companies.
    \75\ See Proposing Release, supra note 3, at 44364.
    \76\ Consistent with the proposal, the final amendments to Item 
101(c) no longer explicitly reference the disclosure requirements 
under Item 101(c)(vi) regarding disclosure of working capital 
practices; or the Item 101(c)(viii) requirement regarding disclosure 
about new segments and the dollar amount of backlog orders believed 
to be firm.
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1. Revenue-Generating Activities, Products and/or Services, and Any 
Dependence on Revenue-Generating Activities, Key Products, Services, 
Product Families, or Customers, Including Governmental Customers
a. Proposed Amendments and Comments
    We proposed to retain as a listed disclosure topic information 
regarding revenue-generating activities, products and/or services, and 
any dependence on key products, services, product families or 
customers, including governmental customers, to the extent this 
information is material to an understanding of the registrant's 
business. We did not receive any comments that addressed this proposal.
b. Final Amendments
    We are adopting the amendment as proposed.\77\ Although we did not 
receive any comments on this proposal, feedback in response to the 
Concept Release indicated that these elements are key to how reasonable 
investors often evaluate the future prospects of a registrant's 
business and that highlighting these topics should elicit more 
informative disclosures.\78\ We continue to believe that disclosure 
regarding revenue-generating activities, products and/or services, and 
any dependence on key products, services, product families, or 
customers, including governmental customers, generally would be 
material to an investment decision.
---------------------------------------------------------------------------

    \77\ In connection with this amendment, the Commission also 
proposed several conforming amendments to Form S-4. See Section 
II.C.1 of the Proposing Release, supra note 3. We did not receive 
any comments on these conforming amendments and are adopting them as 
proposed as well.
    \78\ See Proposing Release, supra note 3, at 44365.
---------------------------------------------------------------------------

2. Status of Development Efforts for New or Enhanced Products, Trends 
in Market Demand, and Competitive Conditions
a. Proposed Amendments and Comments
    We proposed to retain as a listed disclosure topic information 
regarding development efforts for new or enhanced products, trends in 
market demand, and competitive conditions. We had proposed this 
disclosure topic, which elicits more granular information of the type 
currently specified in Item 101(c), in response to comments received on 
the Concept Release. Commenters had recommended more disclosure of a 
registrant's competitive position, especially the market share of its 
products and industry trends shaping the nature of competition.\79\ Our 
principles-based approach to this topic was intended to provide 
registrants with flexibility to disclose this information to the extent 
material to an understanding of their business. We received a few 
comments on this proposal.\80\ One commenter recommended that the 
proposal clarify that registrants are not required to disclose 
proprietary or other sensitive information, which could damage their 
competitive position.\81\ Another commenter recommended that this 
disclosure topic be revised to include ``substantial trends known to

[[Page 63734]]

the company that may ultimately affect market demand.\82\
---------------------------------------------------------------------------

    \79\ Id.
    \80\ See letters from Society and Investor Environmental Health 
Network (``IEHN'').
    \81\ See letter from Society.
    \82\ See letter from IEHN (noting particularly disclosure of 
trends in the development of peer-reviewed scientific literature 
demonstrating potential for substantial health or environmental 
risks associated with the preparer's products or activities).
---------------------------------------------------------------------------

b. Final Amendments
    We are adopting the amendments as proposed. We are not adding a 
clarification that the disclosure of proprietary or other sensitive 
information is not required, as suggested by one commenter. We believe 
the principles-based nature of Item 101(c) disclosure, which the final 
amendments are intended to improve, should provide registrants with 
sufficient flexibility in how they disclose this information, to the 
extent material, without causing undue harm to their business 
operations. Indeed, based on our experience with the current rules, we 
are not aware that registrants have faced significant difficulties 
providing this disclosure. We are also not adopting revisions to the 
final amendments to include disclosure of substantial trends known to 
the company that may ultimately affect market demand, as suggested by 
one commenter. The principles-based disclosure topic should provide 
registrants with flexibility to disclose information about competition 
that is material to an understanding of their business. We also note 
that Item 303(a)(3)(ii) of Regulation S-K requires a registrant to 
describe any known trends or uncertainties that have had or that the 
registrant reasonably expects will have a material impact (favorable or 
unfavorable) on net sales or revenues or income from continuing 
operations. In addition, if the registrant knows of events that will 
cause a material change in the relationship between costs and revenues, 
the change in the relationship must be disclosed under Item 
303(a)(3)(ii).\83\ Thus, including this disclosure in Item 101(c) could 
result in duplicative disclosures.
---------------------------------------------------------------------------

    \83\ We recently proposed amendments to our MD&A disclosure 
requirements to modernize and enhance MD&A disclosures. See MD&A 
Release, supra note 32.
---------------------------------------------------------------------------

3. Resources Material to a Registrant's Business
    Currently, two of the twelve disclosure requirements in Item 101(c) 
relate to registrants' resources: Item 101(c)(1)(iii) requires 
disclosure of the sources and availability of raw materials, and Item 
101(c)(1)(iv) requires disclosure of the importance to the segment and 
the duration and effect of all patents, trademarks, licenses, 
franchises, and concessions held, each to the extent material to an 
understanding of the registrant's business taken as a whole. We 
proposed amending these requirements to refocus registrants' disclosure 
on all resources material to their business. Specifically, we proposed 
to retain these disclosure topics with minor modifications and combine 
them into one principles-based, non-exclusive set of examples of 
information that should be disclosed to extent material to an 
understanding of a registrant's business as a whole.
a. Raw Materials
    Item 101(c)(1)(iii) currently requires disclosure of the sources 
and availability of raw materials. We received several comment letters 
in response to the Concept Release that specifically addressed this 
requirement.\84\ A few commenters on the Concept Release recommended 
retaining this requirement.\85\ One of these commenters specified that 
the disclosure requirement should be retained with a materiality 
overlay,\86\ while the other commenter stated that disclosure should 
only be required if raw materials are difficult to obtain.\87\ Another 
commenter on the Concept Release stated that, when material, 
registrants provide disclosures in response to the specific sub-items 
in Item 101(c), including sources and availability of raw materials, in 
the business narrative or elsewhere, including MD&A.\88\ We proposed 
retaining sources and availability of raw materials as a listed 
disclosure topic in Item 101(c).
---------------------------------------------------------------------------

    \84\ See Proposing Release, supra note 3, at 44365.
    \85\ See letters from Fenwick West LLP (dated Aug. 1, 2016) 
(``Fenwick'') and New York State Society of Certified Public 
Accountants (dated July 19, 2016) (``NYSSCPA''), available at 
https://www.sec.gov/comments/s7-06-16/s70616.htm.
    \86\ See letter from Fenwick.
    \87\ See letter from NYSSCPA.
    \88\ See letter from Davis Polk & Wardwell LLP (dated July 22, 
2016), available at https://www.sec.gov/comments/s7-06-16/s70616.htm.
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(ii) Comments on the Proposed Amendments
    We received limited comment on this aspect of the proposed 
amendments. One commenter supported the proposal, but suggested that it 
should specifically direct registrants to discuss how climate change 
will affect access to raw materials.\89\ Another commenter stated that 
the availability of raw materials as a disclosure topic was established 
at a time when the U.S. economy was largely manufacturing-based and is 
no longer representative of the value drivers of today's technology-
based and intangible-based economy.\90\
---------------------------------------------------------------------------

    \89\ See letter from Southern Environmental Law Center 
(``SELC'').
    \90\ See letter from CFA Institute.
---------------------------------------------------------------------------

(iii) Final Amendments
    After considering the comments received, we are adopting the 
amendments as proposed. In accordance with our overall approach to Item 
101(c), the final amendments emphasize a principles-based approach and 
clarify that disclosure regarding sources and availability of raw 
materials is required only when material to a registrant's business. 
Although the disclosure topic of raw materials might not be applicable 
to all registrants, we continue to believe that, for businesses whose 
products or services depend on raw materials, disclosures regarding 
such raw materials should be provided to the extent material. The one 
commenter's suggestion that the final amendments should require all 
registrants to specifically discuss how climate change will affect 
access to raw materials is not consistent with the principles-based 
nature of Item 101(c), so we are not adopting it.
b. The Duration and Effect of All Patents, Trademarks, Licenses, 
Franchises, and Concessions Held
(i) Proposed Amendments
    Item 101(c)(1)(iv) requires disclosure of the duration and effect 
of all patents, trademarks, licenses, franchises, and concessions held 
to the extent material to an understanding of the registrant's business 
taken as a whole. Since the promulgation of this disclosure 
requirement, intellectual property has become increasingly important to 
the business of a broad range of registrants. Correspondingly, many 
registrants provide detailed disclosure in response to Item 
101(c)(1)(iv), although disclosure varies among registrants and across 
industries. The Concept Release solicited feedback on whether to 
maintain, expand or revise the current scope of this Item and requested 
comment on the competitive costs of this disclosure. Numerous 
commenters supported maintaining the current scope of Item 
101(c)(1)(iv),\91\ with many

[[Page 63735]]

of these opposed to expanding this Item based on competitive 
concerns.\92\
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    \91\ See, e.g., letters from 36 Organizations with an Interest 
in Trade Secret Protection (dated Aug. 8, 2016) (``36 
Organizations''), Association of American Publishers (dated July 21, 
2016), American Intellectual Property Law Association (dated Aug. 9, 
2016) (``American IP Law Association''), Intellectual Property 
Owners Association (dated July 15, 2016) (``IP Owners 
Association''), and Financial Services Roundtable (dated July 21, 
2016), available at https://www.sec.gov/comments/s7-06-16/s70616.htm.
    \92\ See, e.g., letters from 36 Organizations, American IP Law 
Association, Financial Services Roundtable, and IP Owners 
Association, available at https://www.sec.gov/comments/s7-06-16/s70616.htm. Item 101(c)(1)(iv) currently does not refer to 
disclosure of copyrights or trade secrets and these commenters 
expressed concern that requiring such disclosure would impose 
substantial costs on registrants and could have an adverse impact on 
shareholder value.
---------------------------------------------------------------------------

    In light of this feedback we proposed to retain as a listed 
disclosure topic the duration and effect of patents, trademarks, 
licenses, franchises, and concessions held as non-exclusive types of 
property that may be material to a registrant's business.
(ii) Comments on the Proposed Amendments
    In response to the Commission's request for comment on whether the 
proposed amendments should include as a disclosure topic the duration 
and effect of copyright and trade secret protection, one commenter 
stated that the duration and effect of copyright protection is 
extrinsic information that is derived from applicable U.S. and foreign 
copyright laws.\93\ This commenter, however, opposed requiring 
disclosure of the duration of trade secret protection on the ground 
that this information is generally indefinite as it lasts only as long 
as the secret is maintained. Another commenter stated that disclosure 
of a registrant's reliance on copyrights and trade secrets is warranted 
because such disclosure is significant to an understanding of the 
registrant's business and strategic plans.\94\ Other commenters, 
however, opposed requiring disclosure of copyrights and trade secrets, 
contending that such disclosure would not benefit investors and would 
be costly and time-consuming for registrants to prepare.\95\ These 
concerns are consistent with comments we received on the Concept 
Release, in which commenters indicated that because copyright and trade 
secret protection is not contingent on registration, a requirement to 
disclose even a subset of these two types of intellectual property 
would force registrants to systematically identify and catalog these 
types of intellectual property, which could impose substantial costs 
and require significant time.\96\
---------------------------------------------------------------------------

    \93\ See letter from CLA.
    \94\ See letter from CFA Institute.
    \95\ See letters from Society and GM.
    \96\ See, e.g., letters from 36 Organizations, American 
Intellectual Property Law Association (Aug. 9, 2016), U.S. Chamber 
of Commerce (July 20, 2016), FedEx Corporation (July 21, 2016), 
Intellectual Property Owners Association (July 15, 2016), National 
Association of Manufacturers (July 21, 2016), Association of 
American Publishers (July 21, 2016), available at https://www.sec.gov/comments/s7-06-16/s70616.htm. But see letters from 
International Integrated Reporting Council (July 20, 2016) and CFA 
Institute (Oct. 6, 2016) (supporting the inclusion of copyrights 
under Item 101(c)), available at https://www.sec.gov/comments/s7-06-16/s70616.htm.
---------------------------------------------------------------------------

(iii) Final Amendment
    After consideration of the comments, we are adopting the amendment 
as proposed. We are retaining, as a non-exclusive example, disclosure 
about the duration and effect of all patents, trademarks, licenses, 
franchises, and concessions held to the extent material to an 
understanding of the registrant's business taken as a whole. We are not 
expanding the requirement to include the duration and effect of 
copyright and trade secret protections because of the cost and other 
concerns highlighted by commenters.
4. A Description of Any Material Portion of the Business That May Be 
Subject to Renegotiation of Profits or Termination of Contracts or 
Subcontracts at the Election of the Government
a. Proposed Amendment and Comments
    Item 101(c)(1)(ix) requires, to the extent material to an 
understanding of the registrant's business taken as a whole, disclosure 
of any material portion of a business that may be subject to 
renegotiation of profits or termination of contracts or subcontracts at 
the election of the Government.
    Business contracts with agencies of the U.S. government and the 
various laws and regulations relating to procurement and performance of 
U.S. government contracts impose terms and rights that are different 
from those typically found in commercial contracts. In a 1972 Notice to 
Registrants, the Commission noted that government contracts are subject 
to renegotiation of profit and to termination for the convenience of 
the Government.\97\ At any given time in the performance of a 
government contract, an estimate of its profitability may be subject 
not only to additional costs to be incurred, but also to the outcome of 
future negotiations or possible claims relating to costs already 
incurred.\98\
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    \97\ See Defense and Other Long Term Contracts; Prompt and 
Accurate Disclosure of Information, Release No. 33-5263 (June 22, 
1972) [37 FR 21464 (Oct. 11, 1972)].
    \98\ See id.
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    Registrants with U.S. Government contracts tend to disclose that 
the funding of these contracts is subject to the availability of 
Congressional appropriations and that, as a result, long-term 
government contracts are partially funded initially with additional 
funds committed only as Congress makes further appropriations. These 
registrants disclose that they may be required to maintain security 
clearances for facilities and personnel in order to protect classified 
information. Additionally, these registrants state that they may be 
subject to routine government audits and investigations, and any 
deficiencies or illegal activities identified during the audits or 
investigations may result in the forfeiture or suspension of payments 
and civil or criminal penalties.
    We proposed to retain renegotiation or termination of government 
contracts as a disclosure topic, citing our continued belief that, when 
material to a business, disclosure of this information is important for 
investors. We did not receive any comments that addressed this 
proposal.
b. Final Amendment
    We are adopting the amendment as proposed for the reasons discussed 
above.
5. The Extent to Which the Business Is or May Be Seasonal
a. Proposed Amendment and Comments
    Item 101(c)(1)(v) requires, to the extent material to an 
understanding of the registrant's business taken as a whole, disclosure 
of the extent to which the business of the segment is or may be 
seasonal. Although we recently considered eliminating this disclosure 
requirement, noting that other Regulation S-K disclosure requirements 
and U.S. GAAP require disclosures about seasonality in interim 
periods,\99\ we ultimately decided to retain Item 101(c)(1)(v) and 
instead to delete Instruction 5 to Item 303(b) of Regulation S-K, which 
also required a discussion of any seasonal aspects that have had a 
material effect on a registrant's financial condition or results of 
operations.\100\ We proposed to retain this Item out of concern about 
the potential loss of information in the fourth quarter regarding the 
extent to which the business of a registrant or its segment(s) is or 
may be seasonal

[[Page 63736]]

because U.S. GAAP may not elicit this disclosure.\101\
---------------------------------------------------------------------------

    \99\ See Disclosure Update and Simplification Proposed Rule, 
Release No. 33-10110 (July 13, 2016) [81 FR 51607 (Aug. 4, 2016)] 
(``DUSTR Proposing Release''). Public comments on the DUSTR 
Proposing Release are available at https://www.sec.gov/comments/s7-15-16/s71516.htm.
    \100\ The Commission decided to eliminate Instruction 5 to Item 
303(b) because U.S. GAAP in combination with the remainder of Item 
303 requires disclosures in interim reports that convey reasonably 
similar information to the disclosures required by Instruction 5 to 
Item 303(b). See DUSTR Adopting Release, supra note 71, at 50169.
    \101\ See id. ASC 270-10-45-11 states that entities should 
consider supplementing interim reports with information for 12-month 
periods ended at the interim date to avoid the possibility that 
interim results with material seasonal variations may be taken as 
fairly indicative of the estimated results for a full fiscal year.
---------------------------------------------------------------------------

    We received one comment on this aspect of the proposed amendments. 
The commenter recommended that the Commission require registrants with 
seasonal businesses to discuss the impact of climate change on their 
businesses.\102\
---------------------------------------------------------------------------

    \102\ See letter from SELC.
---------------------------------------------------------------------------

b. Final Amendment
    We are adopting the amendment as proposed. Consistent with our 
previous evaluation of this Item, we continue to believe that the 
seasonality of the business or a segment should be disclosed to the 
extent it is material to an understanding of the registrant's business. 
Although a commenter suggested that this non-exclusive example should 
require disclosure about the impact of climate change on seasonal 
businesses, consistent with our response to a similar suggestion 
regarding the raw materials disclosure topic, we are not adding this 
additional specificity to avoid undermining the principles-based nature 
of Item 101(c). Our principles-based approach to this disclosure 
affords registrants sufficient flexibility to address relevant factors 
that may affect seasonality to the extent material to an understanding 
of the registrant's business.
6. Compliance With Material Government Regulations, Including 
Environmental Regulations
a. Proposed Amendment
    Item 101(c)(1)(xii) requires disclosure of the material effects of 
compliance with environmental laws on the capital expenditures, 
earnings, and competitive position of the registrant and its 
subsidiaries, as well as any material estimated capital expenditures 
for the remainder of the fiscal year, the succeeding fiscal year, and 
such future periods that the registrant deems material.
    Pursuant to the National Environmental Policy Act of 1969 
(``NEPA''),\103\ which mandated consideration of the environment in 
regulatory action, in 1973, the Commission adopted a new provision to 
require disclosure of the material effects that compliance with 
Federal, state, and local environmental laws may have on the capital 
expenditures, earnings, and competitive position of the registrant, now 
designated as Item 101(c)(1)(xii).\104\ Subsequent litigation \105\ 
concerning both the denial of a rulemaking petition and adoption of the 
1973 environmental disclosure requirements resulted in the Commission 
initiating public proceedings primarily to elicit comments on whether 
the provisions of NEPA required further rulemaking.\106\ As a result of 
these proceedings, the Commission in 1976 amended the Item 101 
requirements to specifically require disclosure of any material 
estimated capital expenditures for environmental control facilities for 
the remainder of the registrant's current and succeeding fiscal years, 
and for any further periods that are deemed material.\107\
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    \103\ Public Law 91-190, 42 U.S.C. 4321-4347 (Jan. 1, 1970).
    \104\ See Disclosure with Respect to Compliance with 
Environmental Requirements and Other Matters, Release 33-5386 (Apr. 
20, 1973) [38 FR 12100 (May 9, 1973)] (``Environmental Disclosure 
Adopting Release'').
    \105\ See Natural Resources Defense Council, Inc. v. SEC, 389 F. 
Supp. 689 (D.D.C. 1974); and Natural Resources Defense Council, Inc. 
v. SEC, 606 F.2d 1031 (D.C. Cir. 1979), rev'g 432 F. Supp. 1190 
(D.D.C. 1977). See also U.S. Sec. & Exch. Comm'n, Staff Report on 
Corporate Accountability 1, 251-259 (Comm. Print 1979) (``Staff 
Report'') (providing a description of this litigation).
    \106\ See Disclosure of Environmental and Other Socially 
Significant Matters, Release No. 33-5569 (Feb. 11, 1975) [40 FR 7013 
(Feb. 18, 1975)].
    \107\ See Conclusions and Final Action on Rulemaking Proposals 
Relating to Environmental Disclosure, Release No. 33-5704 (May 6, 
1976) [41 FR 21632 (May 27, 1976)]. For further discussion of how 
the Commission has sought to consider environmental effects in its 
business disclosure requirements, see infra Section II.C.2.
---------------------------------------------------------------------------

    Although there is no separate line item requiring disclosure of 
government regulations that may be material to a registrant's business, 
it is common practice for many registrants to include disclosure 
regarding such information in response to Item 101(c)(1)(xii). In 
response to the Concept Release, a few commenters supported requiring 
registrants to disclose all government regulations material to their 
business given that many registrants already voluntarily provide such 
information.\108\
---------------------------------------------------------------------------

    \108\ See Concept Release, supra note 9. For a more extensive 
discussion of the related comment letters see Section II.B.6 of the 
Proposing Release, supra note 3.
---------------------------------------------------------------------------

    In recognition of this common practice and because we believed this 
disclosure would provide important information to investors, we 
proposed including the material effects of compliance with material 
government regulations, not just environmental laws, as a listed 
disclosure topic in Item 101(c).
b. Comments on the Proposed Amendment
    A number of commenters supported the proposal to include the 
material effects of compliance with material governmental regulations, 
not just environmental laws, as a listed disclosure topic in Item 
101(c).\109\ Several of these commenters affirmed that the proposal was 
consistent with current market practice and would provide material 
information to investors.\110\ One commenter suggested that the 
Commission should require disclosure of the impact of material 
government regulations on the business and specify that this must 
include disclosure about environmental risks.\111\ This commenter also 
recommended the Commission adopt a more prescriptive approach to ensure 
that this disclosure provides investors with consistent, comparable 
data about regulatory compliance matters. Other commenters recommended 
that the Commission should require disclosure of international tax 
strategies.\112\
---------------------------------------------------------------------------

    \109\ See, e.g., letters from La Berge, EEI and AGA, Nareit, 
CCMC, FedEx (expressing support for the comments provided by CCMC), 
Virginia Harper Ho (``Harper Ho''), American Securities Association 
(``ASA''), PRI, and Humane Society.
    \110\ See, e.g., letters from CCMC, FedEx, and PRI.
    \111\ See letter from PRI.
    \112\ See, e.g., letters from individuals and entities using 
Letter Type A and PRI.
---------------------------------------------------------------------------

    One commenter stated that the proposed amendment was confusing 
because the text of the amendment repeatedly used the term ``material'' 
and urged the Commission to clarify the rule text.\113\ Another 
commenter recommended that the rule should define the term 
``environmental regulations'' to include, as examples of regulations 
warranting disclosure, animal-welfare and wildlife regulations, and 
regulations relating to climate change.\114\
---------------------------------------------------------------------------

    \113\ See letter from Nareit.
    \114\ See letter from the Humane Society.
---------------------------------------------------------------------------

    Several commenters opposed the proposal to include the material 
effects of compliance with material governmental regulations, not just 
environmental laws, as a listed disclosure topic in Item 101(c).\115\ 
All of these commenters stated that registrants are already required to 
disclose the material impact of compliance with material governmental 
regulations in their MD&A, risk factor, or financial statement 
disclosure. Some of these commenters also expressed concern that the 
preparation of this disclosure could be burdensome to registrants and 
may result in boilerplate disclosure, as

[[Page 63737]]

registrants might feel compelled to provide lengthy recitations of all 
of the laws that affect their business and operations.\116\
---------------------------------------------------------------------------

    \115\ See, e.g., letters from Society, DP&W, FEI and GM.
    \116\ See, e.g., letters from Society, GM and DP&W.
---------------------------------------------------------------------------

c. Final Amendment
    After considering the comments received, we are adopting the 
amendments largely as proposed with certain modifications. Some 
commenters opposed the proposal, asserting that disclosure of the 
material impact of compliance with material governmental regulations is 
required under MD&A or financial statement requirements. Item 
101(c)(1), however, seeks to elicit broader disclosure that may be 
material to an understanding of the registrant's business as a whole, 
whereas disclosure in a registrant's MD&A or financial statements may 
focus more narrowly on the specific impact on a registrant's financial 
results, liquidity and capital resources or balance sheet. As such, we 
agree with the commenters that supported the proposal and stated that 
it would provide material information to investors.\117\
---------------------------------------------------------------------------

    \117\ See, e.g., letters from CCMC, FedEx and PRI.
---------------------------------------------------------------------------

    The final rule will require, to the extent material to an 
understanding of the business taken as a whole, disclosure of the 
material effects that compliance with government regulations, including 
environmental regulations, may have upon the capital expenditures, 
earnings, and competitive position of the registrant and its 
subsidiaries. The final rule also will continue to require registrants 
to include the estimated capital expenditures for environmental control 
facilities for the current fiscal year and any other subsequent period 
that is material.
    In response to the concerns of a commenter,\118\ we have revised 
the text of the proposed rule to eliminate the second instance of the 
word ``material'' that appeared before the term ``government.'' \119\ 
Although we included ``material'' there to make clear that disclosure 
should not include a discussion of every regulation that may apply to a 
registrant, we were persuaded by commenters that the dual use of the 
term ``material'' in the text of the proposed amendment could be 
confusing.\120\ The final amendment more closely follows the existing 
text of Item 101(c)(1)(xii). As we noted in the Proposing Release, 
while existing Item 101(c)(1)(xii) does not require disclosure of 
government regulations that are material to a registrant's business, it 
is common practice for many registrants to include such disclosure in 
response to the Item. Consequently, we think this formulation will be 
less likely to cause confusion. In addition, we believe that this 
principles-based requirement will help provide investors with material 
information about a registrant's compliance with the government 
regulations that are material to an understanding of the registrant's 
business. For this reason, we are not adding prescriptive requirements 
to the final amendment, such as requiring disclosure of international 
tax strategies as recommended by some commenters.\121\ The principles-
based approach of the final rule should improve the ability of each 
registrant to tailor its disclosure to discuss only those governmental 
regulations that are of particular importance to it. The Item does not 
call for, or require, a recitation of every regulation that affects a 
registrant's business and operations.
---------------------------------------------------------------------------

    \118\ See letter from Nareit.
    \119\ We have also made other non-substantive, clarifying 
changes to the text of this disclosure topic.
    \120\ See supra note 116.
    \121\ See, e.g., letters from individuals and entities using 
Letter Type A and PRI.
---------------------------------------------------------------------------

    With respect to one commenter's suggestion that the final amendment 
define the term ``environmental regulations'' to include animal-welfare 
and wildlife regulations, and regulations relating to climate 
change,\122\ we do not believe that this additional specificity is 
necessary. One of the purposes of the final amendment is to make the 
disclosure of the material effects of compliance with government 
regulations more principles-based. Although specific categories of 
government regulations are not identified in the final amendment, 
disclosure of the material effects of compliance with government 
regulations, including animal-welfare and wildlife regulations, would 
be required if material to an understanding of the registrant's 
business.
---------------------------------------------------------------------------

    \122\ See letter from the Humane Society.
---------------------------------------------------------------------------

7. Human Capital Disclosure
a. Proposed Amendment
    Item 101(c)(1)(xiii) currently requires disclosure of the number of 
persons employed by the registrant. Some registrants distinguish 
between the number of full-time and part-time employees, and others 
specify the number of employees in each department or division. Some 
registrants with large numbers of employees disclose the approximate 
number of employees and some registrants discuss their employees' 
membership in a union or similar organization.
    The Concept Release solicited input on this disclosure requirement, 
requesting feedback on, among other things, whether this numeric 
disclosure is still important to investors, and what, if any, 
improvements could be made.\123\ Some commenters on the Concept Release 
recommended retaining and expanding the requirement, while others 
questioned the continued relevance of the requirement.\124\
---------------------------------------------------------------------------

    \123\ See Concept Release, supra note 9, at 23936.
    \124\ See Proposing Release, supra note 3, at 44369.
---------------------------------------------------------------------------

    Subsequent to the issuance of the Concept Release, we received a 
rulemaking petition requesting that the Commission adopt new rules, or 
amend existing rules, to require registrants to disclose information 
about their human capital management policies, practices and 
performance.\125\ This rulemaking petition generated a substantial 
number of comments supporting increased disclosure of human capital 
management policies and specific human capital metrics.\126\
---------------------------------------------------------------------------

    \125\ See Rulemaking petition to require registrants to disclose 
information about their human capital management policies, practices 
and performance, File No. 4-711 (July 6, 2017) (``Human Capital 
Rulemaking Petition''), available at https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.
    \126\ See Comments to File No. 4-711 available at https://www.sec.gov/comments/4-711/4-711.htm.
---------------------------------------------------------------------------

    In light of the feedback that we received on the Concept Release 
and the Human Capital Rulemaking Petition, and as part of our efforts 
to modernize disclosure, we proposed to amend Item 101(c) to replace 
the current requirement to disclose the number of persons employed by 
the registrant with a requirement to provide a description of the 
registrant's human capital resources, including in such description any 
human capital measures or objectives that management focuses on in 
managing the business, to the extent such disclosures would be material 
to an understanding of the registrant's business taken as a whole.\127\ 
In addition, the proposed amendment included non-exclusive examples of 
human capital measures and objectives that may be material, depending 
on the nature of the registrant's business and

[[Page 63738]]

workforce, such as measures or objectives that address the attraction, 
development, and retention of personnel.
---------------------------------------------------------------------------

    \127\ See Proposing Release, supra note 3. The SEC Investor 
Advisory Committee also recommended that the Commission take 
measures to improve the disclosure of a registrant's human capital 
management, and suggested that any disclosure requirements ``should 
be crafted so as to reflect the varied circumstances of different 
businesses, and to eschew simple `one-size-fits-all' approaches that 
obscure more than they add.'' Recommendation of the Investor 
Advisory Committee Human Capital Management Disclosure (Mar. 28, 
2019), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/human-capital-disclosure-recommendation.pdf.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendment
    Many commenters expressed general support for the inclusion of 
human capital as a disclosure topic.\128\ Several commenters expressly 
supported a principles-based approach to human capital disclosure.\129\ 
While supporting the principles-based approach in the proposal, some 
commenters urged the Commission to proceed with caution and expressed 
concerns that prescriptive requirements may elicit immaterial 
disclosures.\130\ Many other commenters called for a combination of 
principles-based and prescriptive requirements that would include 
disclosure of specified quantitative metrics.\131\
---------------------------------------------------------------------------

    \128\ See, e.g., letters from International Center for 
Enterprise Engagement (``ICEE''), JT Foxx Reviews Research Team 
(``JT Foxx''), Intellivest Securities, Inc., Enhance Product 
Development, Inc. (``EPD''), the Hashimoto's Solution 
(``Hashimoto''), Auto Connection Manassas VA (``Auto Connection''), 
Yoga Burn Challenge (``Yoga Burn''), Sustainability Accounting 
Standards Board (letter dated Oct. 17, 2019, ``SASB 1''), Legal & 
General Investment Management (``LGIM''), CFA Institute, 
Breckinridge, Paul Rissman (``Rissman''), LaBerge, E&Y, Oregon State 
Treasury (``OST''), IEHN, Calvert Research and Management 
(``Calvert''), Dunker, EEI and AGA, CtW Investment Group (``CtW''), 
CCMC, FedEx, UnitedHealth Group, Harper Ho, Los Angeles County 
Employees Retirement Association (``LACERA''), PRI, Society for 
Human Resource Management (``SHRM''), California State Teachers' 
Retirement System (``CalSTRS''), Judy Schultz (``Schultz''), DP&W, 
Hermes Equity Ownership Services Limited (``Hermes''), Better 
Markets Inc. (``Better Markets''), Willis Towers Watson (``Towers 
Watson''), AFL-CIO, Mercer, Human Capital Management Coalition 
(``HCMC''), HR Policy Association (``HR Policy''), Senator Mark 
Warner, (``Sen. Warner''), Public Citizen, Norges Bank Investment 
Management (``Norges Bank''), CalPERS, the Forum for Sustainable and 
Responsible Investment (``SIF''), Domini, New York State Common 
Retirement Fund (``NYSCRF''), Radiant Value Management (``RVM''), 
GRI, New York City Comptroller (``NYC Comptroller''), BCI, Timothy 
G. Coville (``Coville''), JUST Capital, Qin Li, ShareAction, Service 
Employees International Union (``SEIU''), Catherine Smith (``C. 
Smith''), and.
    \129\ See, e.g., letters from ICEE, CII, LaBerge, SHRM, Towers 
Watson, Mercer, HR Policy, Hashimoto, EPD, Auto Connection, GRI, 
Yoga Burn, EEI and AGA, CCMC, C. Smith, SEIU and FedEx.
    \130\ See, e.g., letters from SHRM, FedEx, and CCMC.
    \131\ See, e.g., letters from LGIM, Calvert, OST, CtW, Harper 
Ho, LACERA, PRI, CalSTRS, Hermes, Better Markets, AFL-CIO, HCMC, 
BCI, Sen. Warner, Coville, Norges Bank, CalPERS, SIF, Domini, 
NYSCRF, CFA Institute, ShareAction, JUST Capital and NYC 
Comptroller.
---------------------------------------------------------------------------

    Many other commenters expressed opposition to the proposed 
principles-based approach to human capital disclosure.\132\ Some of 
these commenters stated that the proposed principles-based approach 
would not likely elicit meaningful information about human capital 
practices, or provide sufficiently comparable disclosure, unless 
grounded in standardized metrics.\133\ Several commenters stated that 
companies disclose a wide range of human capital information and that 
this could lead to confusion among investors.\134\ One commenter stated 
that requiring human capital disclosure would be inconsistent with the 
Commission's mission.\135\ Some commenters urged the Commission to 
consider providing interpretive guidance on human capital in light of 
existing disclosure obligations.\136\ Other commenters expressed 
concern based on their view that the principles-based approach would 
rely entirely on the judgment of management to determine the substance 
of the information to disclose and would result in less disclosure 
being provided than would be the case under a prescriptive disclosure 
requirement.\137\
---------------------------------------------------------------------------

    \132\ See, e.g., letters from UnitedHealth Group; CLA; David 
Burton (``Burton''); Amazon Watch, American Federation of State, 
County and Municipal Employees, As You Sow, California Clean Money 
Campaign, Campaign for Accountability, Center for American Progress, 
Congregation of Sisters of St. Agnes, Environment America, Friends 
Fiduciary Corporation, Global Witness, Green Century Capital 
Management, Harrington Investments, Inc., Institute for Agriculture 
and Trade Policy, Interfaith Center on Corporate Responsibility, 
Jantz Management LLC, Miller/Howard Investments, Inc., New 
Progressive Alliance, Newground Social Investment, SPC, NorthStar 
Asset Management, Inc., Northwest Coalition for Responsible 
Investment, Oil Change International, OIP Trust, Oxfam America, Pax 
World Funds, Public Citizen, Railroads & Clearcuts Campaign, 
Reynders, McVeigh Capital Management LLC, Sierra Club, Teamsters, 
Tri-State Coalition for Responsible Investment, U.S. PIRG, Union of 
Concerned Scientists, Women's Institute for Freedom of the Press. 
(``33 Organizations''); GM; DP&W Domini; NYSCRF; Public Citizen; 
RVM; FEI; Schultz; Rissman; Society; ICGN; and Breckinridge.
    \133\ See, e.g., letters from Domini, RVM, HCMC, CalPERS, 
Rissman, LGIM, ICGN, OST, NYSCRF, NYC Comptroller, FEI and LACERA.
    \134\ See, e.g., letters from FEI, LACERA, HCMC and NYSCRF.
    \135\ See letter from the Heritage Foundation (contending that 
the mission of the Commission does not include furthering any 
social, environmental or other criteria).
    \136\ See, e.g., letters from GM, Society, DP&W and Chevron.
    \137\ See, e.g., letters from HCMC, CalPERS, NYC Comptroller, 
Domini, NYSCRF, FEI, PRI, LACERA, Breckinridge, ShareAction and 
SEIU.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether the 
proposed amendment should include other non-exclusive examples of human 
capital measures or objectives, such as the number and types of 
employees, including the number of full-time, part-time, seasonal, and 
temporary workers. A number of commenters supported the inclusion of 
specific human capital management disclosure metric requirements or 
examples.\138\ Many of these commenters emphasized the importance of 
comparability and stated that the use of different metrics would make 
it difficult for investors to analyze and compare information.\139\ 
Several commenters recommended that we require specific, or encourage 
companies to use certain, third-party disclosure standards or 
frameworks to provide human capital disclosure.\140\ One commenter 
supported the inclusion of non-exclusive examples that do not focus on 
numerical measurements, and argued that the disclosure requirement 
should not promote comparability.\141\ This commenter stated that 
because every registrant is different, the way in which each registrant 
defines and measures human capital related objectives necessarily 
varies widely.
---------------------------------------------------------------------------

    \138\ See, e.g., letters from Louis E. Matthews, Jr., Schultz, 
SASB 1, LGIM, IEHN, Dunker, FCLTGlobal (``FCLTGlobal''), PRI, 
CalSTRS, Better Markets, HCMC, BCI, Sen. Warner, Public Citizen, 
CalPERS, SIF, Domini, NYSCRF, NYC Comptroller, ICEE, OST, LACERA, 
Hermes, Burton, SEIU, CtW, ICGN, Towers Watson, AFL-CIO, 33 
Organizations, JT Foxx, EPD, Hashimoto, Auto Connection, Yoga Burn, 
Bec Brideson, Calvert, Breckinridge, CFA Institute, ShareAction, Qin 
Li, JUST Capital and Letter Type A.
    \139\ See, e.g., letters from SASB 1, LGIM, Calvert, E&Y, OST, 
FCLTGlobal, LACERA, PRI, CalSTRS, Hermes, SEIU, E&Y, Better Markets, 
HCMC, BCI, Sen. Warner, Coville, Public Citizen, Norges Bank, 
CalPERS, SIF, Domini, NYSCRF, RVM, Breckinridge, ShareAction, CFA 
Institute and NYC Comptroller.
    \140\ See, e.g., letters from Domini (recommending frameworks 
published by the International Organization for Standardization, the 
Global Reporting Initiative, the Sustainability Accounting Standards 
Board, the Workforce Disclosure Initiative, and the Carbon 
Disclosure Project), SASB 1, Coville, Norges Bank (recommending the 
Sustainability Accounting Standards Board framework), Breckinridge 
(recommending the Sustainability Accounting Standards Board 
framework) and RVM. See also, e.g., letters from GRI, ICEE, SASB 1, 
Coville, CII, LACERA, Domini, RVM, Breckinridge and Norges Bank.
    \141\ See letter from Towers Watson.
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    A number of commenters, also highlighting the limitations of 
mandating or suggesting certain metrics for the purpose of increasing 
comparability in this area, opposed the inclusion of either non-
exclusive examples or prescriptive human capital management disclosure 
metrics.\142\ Some of these commenters stated that there was no 
consensus on the most appropriate metrics or methodology for human 
capital management disclosure.\143\ Other commenters expressed concern 
that a list of non-

[[Page 63739]]

exclusive examples could be viewed as mandated disclosure, which could 
result in registrants providing immaterial disclosure.\144\
---------------------------------------------------------------------------

    \142\ See, e.g., letters from CCMC, FedEx, SHRM, GM, Mercer, 
Society, HR Policy, DP&W, FEI and Chevron.
    \143\ See, e.g., letters from HR Policy, Society and GM.
    \144\ See, e.g., letters from Mercer (``[P]roviding specific 
examples of the types of measures or objectives that companies focus 
on in managing their business, such as those that address the 
attraction, development, and retention of personnel, as proposed, 
could result in disclosure that is potentially misleading and is 
less valuable to investors because it is not tailored to a company's 
specific business or industry.''), Towers Watson, and HR Policy.
---------------------------------------------------------------------------

    In the Proposing Release, we also requested comment on whether we 
should define human capital. Several commenters stated that human 
capital should be defined,\145\ while a few opposed a Commission 
definition of the term.\146\ One of these commenters stated that there 
were many definitions of human capital and that the concept is often 
tailored to the circumstances and objectives of individual 
companies.\147\ The other commenter stated that the Commission should 
resist defining human capital because there is no standard method to 
assess ``human capital management'' and because it is a complex concept 
with many factors influencing human capital management that vary across 
industries and individual companies.\148\
---------------------------------------------------------------------------

    \145\ See, e.g., letters from CalSTRS, CtW, HCMC, NYC 
Comptroller, Towers Watson, ICEE and PRI (advocating for defining 
human capital management as ``people's competencies, capabilities 
and experience, and their motivations to innovate.''). Cf. letter 
from Burton (``definition for human capital should include human 
capital measures or objectives that management focuses on in 
managing the business'').
    \146\ See letters from Mercer and HR Policy.
    \147\ See letter from HR Policy.
    \148\ See letter from Mercer.
---------------------------------------------------------------------------

    We also requested comment on whether we should retain the 
requirement in Item 101(c) for registrants to disclose the number of 
persons employed by the registrant. Several commenters urged the 
Commission to retain the requirement.\149\ One of these commenters 
stated that this disclosure provides investors with valuable 
information that can be used in assessing productivity growth, 
compensation measures, and capital allocation.\150\ A number of 
commenters recommended that the Commission require additional 
information regarding the number of persons employed by the registrant, 
such as the number of full-time, part-time, and contingent workers; the 
number of seasonal employees; the ratio of full-time to part-time 
employees; or the number of domestic and foreign employees.\151\ Some 
commenters, however, stated that the requirement to disclose the number 
of employees was arbitrary, outdated, and of limited use.\152\
---------------------------------------------------------------------------

    \149\ See, e.g., letters from CII, 33 Organizations, PRI and 
CtW.
    \150\ See letter from CtW.
    \151\ See, e.g., letters from CalSTRS, Domini, CalPERS, CII, 
Burton, BCI, NYC Comptroller, ICEE, LGIM, OST, LACERA, PRI, Hermes, 
SEIU, CFA Institute, CtW, ICGN, Towers Watson, AFL-CIO, HCMC, Sen. 
Warner, CalPERS, SIF and NYSCRF.
    \152\ See, e.g., letters from EEI and AGA, CCMC, Hermes, Better 
Markets, CalSTRS, FedEx and Mercer.
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c. Final Amendment
    After considering public comments, we are adopting this amendment 
substantially as proposed with certain modifications. Under the final 
amendments, Item 101(c) will require, to the extent such disclosure is 
material to an understanding of the registrant's business taken as a 
whole, a description of a registrant's human capital resources, 
including any human capital measures or objectives that the registrant 
focuses on in managing the business. We believe that, in many cases, 
human capital disclosure is important information for investors. Human 
capital is a material resource for many companies and often is a focus 
of management, in varying ways, and an important driver of performance.
    The final amendments identify various human capital measures and 
objectives that address the attraction, development, and retention of 
personnel as non-exclusive examples of subjects that may be material, 
depending on the nature of the registrant's business and workforce. We 
emphasize that these are examples of potentially relevant subjects, not 
mandates. Each registrant's disclosure must be tailored to its unique 
business, workforce, and facts and circumstances. Consistent with the 
views expressed by some commenters, we did not include more 
prescriptive requirements because we recognize that the exact measures 
and objectives included in human capital management disclosure may 
evolve over time and may depend, and vary significantly, based on 
factors such as the industry, the various regions or jurisdictions in 
which the registrant operates, the general strategic posture of the 
registrant, including whether and the extent to which the registrant is 
vertically integrated, as well as the then-current macro-economic and 
other conditions that affect human capital resources, such as national 
or global health matters.\153\ Although several commenters expressed 
concern that the principles-based approach could result in less 
comparability (as compared to a more prescriptive approach), given the 
varied and evolving nature of human capital considerations, we believe 
that this approach will likely lead to more meaningful disclosure being 
provided to investors. Moreover, we do not believe that prescriptive 
requirements or a designated standard or framework will ensure more 
comparable disclosure given the variety in registrant operations as 
well as how registrants define, calculate, and assess human capital 
measures.\154\ Furthermore, we note that while the final amendments do 
not require registrants to use a disclosure standard or framework to 
provide human capital disclosure, as recommended by some 
commenters,\155\ a principles-based approach affords registrants the 
flexibility to tailor their disclosures to their unique circumstances, 
including by providing disclosure in accordance with some or all of the 
components of any current or future standard or framework that 
facilitates human capital resource disclosure that is material to an 
understanding of the registrant's business taken as a whole.
---------------------------------------------------------------------------

    \153\ See, e.g., letters from Mercer and HR Policy.
    \154\ See, e.g., U.S. Gov't Accountability Office, GAO-20-530, 
Public Companies: Disclosure of Environmental, Social, and 
Governance Factors and Options to Enhance Them (July 2020), 
available at https://www.gao.gov/assets/710/707949.pdf (finding lack 
of consistency across companies that use the same framework to 
assess environmental, social, and governance (ESG) matters); Alex 
Edmans, Grow the Pie: How Great Companies Deliver Both Purpose and 
Profit (2020) (stating that non-financial measures are inherently 
incomparable because they depend on a company's unique purpose).
    \155\ See, e.g., letters from GRI, ICEE, SASB 1, Coville, CII, 
LACERA, Domini, RVM, Breckinridge and Norges Bank.
---------------------------------------------------------------------------

    We also are not adopting a definition of the term ``human capital'' 
as recommended by some commenters because this term may evolve over 
time and may be defined by different companies in ways that are 
industry specific. This approach is consistent with the view expressed 
by a number of commenters that noted that there are many definitions of 
human capital and that the concept, while generally well understood, is 
often tailored to the circumstances and objectives of individual 
companies.\156\
---------------------------------------------------------------------------

    \156\ See, e.g., letter from HR Policy and Mercer.
---------------------------------------------------------------------------

    In a change from the proposal, a registrant will need to disclose, 
to the extent material to an understanding of the registrant's 
business, the number of persons employed by the registrant. We agree 
with commenters that this disclosure topic should be retained and that 
it can provide investors with important and useful information that is 
material to an understanding of the

[[Page 63740]]

registrant's business.\157\ The number of persons employed by the 
registrant can help investors assess the size and scale of a 
registrant's operations as well as changes over time. In addition, we 
believe this disclosure will complement, and could provide essential 
context to, any discussion of a registrant's human capital management. 
Although many commenters recommended that we expand this disclosure 
topic to include additional metrics, such as the number of full-time, 
part-time, and contingent workers, and employee turnover,\158\ we are 
not adopting these prescriptive elements because we believe that they 
would be inconsistent with our objective to make Item 101(c) more 
principles-based. We note that, under the principles-based approach we 
are adopting, to the extent that a measure, for example, of a 
registrant's part-time employees, full-time employees, independent 
contractors and contingent workers, and employee turnover, in all or a 
portion of the registrant's business, is material to an understanding 
of the registrant's business, the registrant must disclose this 
information.
---------------------------------------------------------------------------

    \157\ See, e.g., letters from CII and CtW.
    \158\ See, e.g., letters from CalSTRS, Domini, CalPERS, CII, 
Burton, BCI, NYC Comptroller, ICEE, LGIM, OST, LACERA, PRI, Hermes, 
SEIU, CFA Institute, CtW, ICGN, Towers Watson, AFL-CIO, HCMC, Sen. 
Warner, CalPERS, SIF and NYSCRF.
---------------------------------------------------------------------------

C. Legal Proceedings (Item 103)

    Item 103 requires disclosure of any material pending legal 
proceedings, other than ordinary routine litigation incidental to the 
business, to which the registrant or any of its subsidiaries is a party 
or of which any of their property is the subject. Item 103 also 
requires disclosure of the name of the court or agency in which the 
proceedings are pending, the date instituted, and the principal parties 
thereto and a description of the factual basis alleged to underlie the 
proceeding and the relief sought. Similar information is to be included 
for such proceedings known to be contemplated by governmental 
authorities.
    The Commission first adopted a requirement to disclose all pending 
litigation that may materially affect the value of the security to be 
offered, describing the origin, nature and name of parties to the 
litigation, as part of Form A-1 in 1933.\159\ Over time, this 
disclosure requirement was expanded to include, among other things, the 
date the proceeding was instituted, the identity of the responsible 
court or agency, and a requirement that material bankruptcy proceedings 
involving the registrant or its significant subsidiaries be described 
and any material proceeding involving a director, officer, affiliate, 
or principal security holder.\160\ Moreover, in connection with NEPA, 
the legal proceedings disclosure requirement was expanded to require 
additional disclosure about environmental matters.\161\
---------------------------------------------------------------------------

    \159\ See Form A-1, Item 17, adopted in Release No. 33-5 (July 
6, 1933) [not published in the Federal Register].
    \160\ See Proposing Release, supra note 3, at 44372.
    \161\ See Environmental Disclosure Adopting Release, supra note 
107.
---------------------------------------------------------------------------

    In the Proposing Release, we noted that Item 103 and U.S. GAAP have 
overlapping disclosure requirements, but that these requirements 
nonetheless differ in certain respects.\162\ Often, in complying with 
Item 103, registrants repeat some or all of the disclosures provided in 
the notes to the financial statements under U.S. GAAP or include a 
cross-reference thereto. In the DUSTR Proposing Release, the Commission 
solicited comment concerning whether to retain, modify, eliminate, or 
refer the Item 103 disclosure requirements to the Financial Accounting 
Standards Board for potential incorporation into U.S. GAAP.\163\ Many 
of the commenters on the DUSTR Proposing Release opposed the 
integration of Item 103 into U.S. GAAP.\164\
---------------------------------------------------------------------------

    \162\ See Proposing Release, supra note 3, at 44373.
    \163\ See Disclosure Update and Simplification Proposed Rule, 
Release No. 33-10110 (July 13, 2016) [81 FR 51607 (Aug. 4, 2016)] 
(``DUSTR Proposing Release'') at 51633.
    \164\ See Proposing Release, supra note 3, at 44372.
---------------------------------------------------------------------------

    In response to these concerns, the Commission decided to retain the 
disclosure requirements in Item 103, stating that further consideration 
was warranted with respect to the implications of potential changes to 
these requirements.\165\ Given the concerns expressed by commenters in 
response to the DUSTR Proposing Release, and after further 
consideration of how to improve the disclosure requirements in Item 
103, we proposed the following amendments to Item 103.
---------------------------------------------------------------------------

    \165\ See DUSTR Adopting Release, supra note 71.
---------------------------------------------------------------------------

1. Expressly Provide for the Use of Hyperlinks or Cross-References To 
Avoid Repetitive Disclosure
a. Proposed Amendment
    In an effort to encourage registrants to avoid duplicative 
disclosure, we proposed to amend Item 103 to expressly state that this 
disclosure may be provided by hyperlink or cross-reference to legal 
proceedings disclosure located elsewhere in the document, such as in 
Management's Discussion & Analysis (MD&A), Risk Factors, or notes to 
the financial statements.
b. Comments on the Proposed Amendment
    Many commenters supported the use of hyperlinks or cross-references 
to provide legal proceedings disclosure and to avoid repetitive 
disclosure.\166\ Several commenters indicated that this approach would 
help decrease duplicative disclosures in filings.\167\ Other commenters 
stated that using hyperlinks would improve the navigability of 
documents.\168\ One commenter stated that many registrants commonly 
cross-reference to disclosures concerning legal proceedings contained 
in the notes to the financial statements or elsewhere in a filing.\169\
---------------------------------------------------------------------------

    \166\ See, e.g., letters from IBC, CLA, EEI and AGA, DP&W, 
Nareit, CCMC, FedEx, CII, Society, GM, NYC Bar Association, Nasdaq, 
Chevron, and ASA.
    \167\ See, e.g., letters from EEI and AGA, IBC, CCMC, ASA, 
Chevron and Nasdaq.
    \168\ See, e.g., letters from Society, GM and Nasdaq.
    \169\ See letter from FEI.
---------------------------------------------------------------------------

    Another commenter, although supportive of this proposal, expressed 
concern that the use of multiple hyperlinks or cross-references could 
increase search costs for investors who would have to spend additional 
time retrieving and piecing together disclosures located in different 
sections of a filing.\170\ This commenter recommended that the 
amendment place limits on a registrant's use of multiple hyperlinks.
---------------------------------------------------------------------------

    \170\ See letter from CII.
---------------------------------------------------------------------------

    One commenter expressed opposition to the use of hyperlinks to 
provide legal proceedings disclosure because it would result in 
``search expeditions'' to find the disclosure.\171\ This commenter 
claimed that a registrant is best positioned to determine the most 
effective means to organize and present information in its filing to 
investors. Another commenter claimed that duplicative information was 
not problematic if such disclosures were consistent throughout the 
filing. In addition, this commenter indicated that the proposal did not 
address inaccurate or inactive hyperlinks.\172\
---------------------------------------------------------------------------

    \171\ See letter from ICGN.
    \172\ See letter from CalPERS.
---------------------------------------------------------------------------

c. Final Amendment
    We are adopting the amendment as proposed. The final rules will 
clarify that registrants are permitted to provide disclosure responsive 
to Item 103 by hyperlink or cross-reference to legal proceedings 
disclosure elsewhere in the document, such as in MD&A, Risk Factors, or 
a note to the financial statements.
    We do not believe it is necessary to place a restriction on the 
ability of registrants to use multiple hyperlinks to

[[Page 63741]]

provide disclosure of legal proceedings pursuant to revised Item 103 or 
address inactive hyperlinks as suggested by some commenters,\173\ 
because a hyperlink used in response to Item 103 would be an internal 
hyperlink that connects a reader to a different section within the same 
document or web page (and also would be less likely to become broken or 
inactive) as opposed to an external hyperlink that connects a reader to 
a different document. Clarifying that registrants can use hyperlinks 
furthers a primary goal of the proposal to reduce duplicative 
disclosure. As we noted in the Proposing Release, in order to comply 
with existing Item 103, many registrants commonly repeat some or all of 
the disclosures that are provided in the notes to the financial 
statements under U.S. GAAP or include a cross-reference to those 
disclosures. We believe placing restrictions on the use of hyperlinks 
or cross-references would reduce the flexibility of registrants to 
present this information in a manner that they deem to be the most 
effective.
---------------------------------------------------------------------------

    \173\ See letters from CII and CalPERS.
---------------------------------------------------------------------------

2. Updated Disclosure Threshold for Environmental Proceedings in Which 
the Government Is a Party
a. Proposed Amendments
    Instruction 5.C. to Item 103 specifically requires registrants to 
disclose any proceeding under environmental laws to which a 
governmental authority is a party unless the registrant reasonably 
believes it will not result in sanctions of $100,000 or more; provided, 
however, that such proceedings which are similar in nature may be 
grouped and described generally. The Commission added this requirement 
to Item 103 in 1982.\174\ Since that time, the $100,000 disclosure 
threshold for environmental proceedings in which the government is a 
party has not been changed. We proposed to increase this threshold to 
$300,000 to adjust it for inflation.\175\ In addition, we proposed to 
reorganize Item 103 to incorporate its instructions into the text of 
the Item.
---------------------------------------------------------------------------

    \174\ See Adoption of Integrated Disclosure System, Release No. 
33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (``1982 
Integrated Disclosure Adopting Release'').
    \175\ Starting from May 1981, the month the release in which the 
$100,000 amount was first published, Commission staff used the 
Consumer Price Index (CPI) Inflation Calculator (available at 
https://data.bls.gov/cgi-bin/cpicalc.pl) to calculate the inflation 
adjusted amount to be $285,180.40 as of May 2019. For ease of 
reference, the Commission rounded this figure to $300,000.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Comments on the proposed amendment were mixed. Several commenters 
supported the proposal to revise the $100,000 threshold for 
environmental proceedings to which the government is a party to 
$300,000 to adjust for inflation, or supported the retention of a 
quantitative threshold without recommending a specific amount.\176\ One 
of these commenters concurred that a bright-line disclosure threshold 
provides a useful benchmark and promotes comparability.\177\ Another 
commenter, while supportive of the increased threshold, recommended 
that the Commission consider whether the fixed dollar amount should be 
eliminated in favor of a materiality standard.\178\ Other commenters 
recommended that the threshold should be periodically indexed for 
inflation.\179\ A few commenters suggested adopting a hybrid approach 
of requiring disclosure of any fine above a quantitative threshold of 
at least $300,000 that is determined to be material.\180\
---------------------------------------------------------------------------

    \176\ See, e.g., letters from Harper Ho, SELC, NYC Bar 
Association and Nasdaq.
    \177\ See letter from SELC.
    \178\ See letter from Nasdaq.
    \179\ See, e.g., letters from DP&W, Society and GM.
    \180\ See, e.g., letters from Society and DP&W.
---------------------------------------------------------------------------

    Many commenters opposed the proposal to revise the $100,000 
threshold to $300,000 to adjust for inflation.\181\ Several of these 
commenters recommended that the proposed amendment use a materiality-
based standard rather than a fixed dollar amount.\182\ Some of these 
commenters recommended that the proposed amendment include a non-
exhaustive list of qualitative factors that a registrant should 
consider when assessing the materiality of an environmental 
proceeding.\183\ These commenters suggested that such factors could 
include whether a fine brought by a governmental authority is 
indicative of potentially significant environmental compliance problems 
and whether the fine relates to conduct for which the company 
previously has been sanctioned. These commenters also suggested that if 
the Commission were to retain a quantitative threshold, we should 
correlate the threshold to a registrant's market capitalization or some 
other benchmark that may be more indicative of materiality on a 
company-specific basis.\184\ Some of these commenters stated that the 
use of a materiality-based standard would eliminate the guesswork to 
determine whether a potential monetary sanction will equal or exceed 
the dollar threshold and require disclosure.\185\ Several commenters 
that supported a materiality-based threshold stated that one-size-fits-
all quantitative thresholds are arbitrary and result in disclosure that 
may not be material to investors and can obscure other, more meaningful 
information about a company's material legal proceedings.\186\
---------------------------------------------------------------------------

    \181\ See, e.g., letters from CII, 33 Organizations, E&Y, IEHN, 
Society, DP&W, CCMC, NYSCRF, EEI and AGA, David Young, FedEx, FEI, 
Chevron, CalPERS, Humane Society, Domini, PRI, CFA Institute and GM.
    \182\ See, e.g., letters from E&Y, Society, DP&W, CCMC, FedEx, 
Chevron and GM.
    \183\ See letters from Society, DP&W and GM.
    \184\ Id.
    \185\ See letters from Society and DP&W.
    \186\ See, e.g., letters from Society and DP&W.
---------------------------------------------------------------------------

    Other commenters, however, opposed the use of a materiality 
standard for environmental proceedings and stated that larger 
registrants likely would not provide any disclosure of environmental 
proceedings under Item 103.\187\ A few commenters recommended that we 
retain the current $100,000 threshold.\188\ Several commenters 
expressed concerns that the proposed $300,000 threshold may result in 
reduced environmental proceedings disclosure.\189\
---------------------------------------------------------------------------

    \187\ See, e.g., letters from CalPERS and PRI.
    \188\ See, e.g., letters from CalPERS and Humane Society 
(suggesting that the $100,000 threshold be maintained or adjusted to 
reflect an actual data-driven dollar amount that more accurately 
represents a division between environmental proceedings that pose 
material risks to businesses and those that do not).
    \189\ See, e.g., letters from IEHN, Public Citizen, CalPERS, 
Domini and PRI.
---------------------------------------------------------------------------

    We also received comments that supported increasing the disclosure 
threshold above $300,000.\190\ However, these commenters did not 
believe that the threshold should be a fixed dollar amount. These 
commenters stated that it was more burdensome for larger registrants to 
gather and disclose environmental proceedings based on a universal 
fixed threshold applicable to all registrants as such a threshold would 
likely not be material to larger registrants. These commenters 
recommended using a threshold that was the greater of $1 million or an 
amount that was material to the registrant.\191\ These commenters 
stated that such an approach would ensure that information disclosed is 
useful to investors without the risk of being overly burdensome to the 
preparers of filings or becoming obsolete due to passage of time.
---------------------------------------------------------------------------

    \190\ See letter from EEI and AGA.
    \191\ Id.
---------------------------------------------------------------------------

c. Final Amendment
    After considering the public comments, we are adopting the

[[Page 63742]]

amendments to reorganize Item 103 to eliminate the current instructions 
to the Item and incorporate their contents in the text of Item 103 as 
proposed. In addition, as discussed in more detail below, we are 
adopting a modified disclosure threshold that increases the existing 
quantitative threshold but that also affords a registrant some 
flexibility by providing a range within which the registrant can select 
a different threshold that it determines is reasonably designed to 
result in disclosure of material environmental proceedings.\192\
---------------------------------------------------------------------------

    \192\ We are also amending Schedule 14A to update a cross-
reference to the instructions to Item 103.
---------------------------------------------------------------------------

    The Commission has in the past considered and received feedback on 
a materiality standard for environmental disclosures.\193\ As the 
Commission noted when it first adopted the $100,000 threshold for 
disclosure of environmental proceedings in 1981, disclosure of fines by 
governmental authorities may be of particular importance in assessing a 
registrant's environmental compliance, as governmental fines may be 
more indicative of possible illegality and conduct contrary to public 
policy.\194\ At the same time, as pointed out by several commenters on 
the proposal, for many registrants a one-size-fits-all quantitative 
threshold may result in the disclosure of information that is not 
material in assessing whether a registrant has significant 
environmental compliance problems.\195\
---------------------------------------------------------------------------

    \193\ For example, in 1996, the Task Force on Disclosure 
Simplification recommended replacing the $100,000 threshold with a 
general materiality standard or, alternatively, recommended raising 
the dollar threshold. See Report of the Task Force on Disclosure 
Simplification (Mar. 5, 1996), available at https://www.sec.gov/news/studies/smpl.htm. More recently, in 2016, the Commission 
received feedback from commenters on the DUSTR Proposing Release 
that opposed the elimination of any bright-line thresholds in 
Commission disclosure requirements because the thresholds establish 
a baseline of disclosure for all registrants in certain areas. See 
DUSTR Proposing Release, supra note 99.
    \194\ See Proposed Amendments to Item 5 of Regulation S-K 
Regarding Disclosure of Certain Environmental Proceedings, Release 
No. 33-6315 (May 5, 1981) [46 FR 25638 (May 8, 1981)].
    \195\ See, e.g., letters from Society and DP&W.
---------------------------------------------------------------------------

    We further observe that environmental proceedings often can be 
complex from a factual and legal standpoint. A bright-line test can 
help registrants assess whether a particular proceeding is subject to 
disclosure and provide certainty about when disclosure is required. 
However, we also recognize that a single numerical threshold may result 
in some disclosures that are not material.
    After weighing these various considerations, we are persuaded by 
commenters who suggested a hybrid approach that includes a quantitative 
threshold while also providing registrants with the flexibility to 
apply a more tailored disclosure threshold that would best accomplish 
the Commission's objectives.\196\ We believe a hybrid approach will 
continue to elicit information that is important to investors in 
assessing a registrant's environmental compliance while enabling 
registrants to apply a disclosure threshold that is more indicative of 
materiality on a company-specific basis. For these reasons, we are 
adopting a modified disclosure requirement for environmental 
proceedings involving monetary sanctions that sets forth a quantitative 
disclosure threshold range within which registrants may determine a 
threshold that will result in disclosure of material information 
concerning environmental proceedings.
---------------------------------------------------------------------------

    \196\ See supra note 184.
---------------------------------------------------------------------------

    Accordingly, under the final rule, disclosure will be required for 
any proceeding that involves potential monetary sanctions of $300,000 
or more, or at the election of the registrant, such other amount that 
the registrant determines is reasonably designed to result in 
disclosure of any such proceeding that is material to its business or 
financial condition. However, irrespective of any alternative threshold 
adopted by the registrant, disclosure will be required in all cases for 
any proceeding when the potential monetary sanctions exceed the lesser 
of $1 million or one percent of the current assets of the registrant 
and its subsidiaries on a consolidated basis. Furthermore, if a 
registrant chooses to use a threshold other than the $300,000 
threshold, it must disclose this threshold (including any change 
thereto) in each annual and quarterly report. We believe this approach 
avoids a mandatory one-size-fits-all disclosure threshold that may 
potentially result in the disclosure of information that is not 
material by allowing registrants to determine a company-specific 
disclosure threshold that is more relevant to their particular 
circumstances.
    We acknowledge commenters' concerns that use of a materiality 
standard for environmental proceedings could result in larger 
registrants providing less disclosure under Item 103. For that reason, 
the final rule stipulates that the alternative disclosure threshold may 
not exceed certain parameters. The sliding-scale standard of the lesser 
of $1 million or one percent of the current assets builds on commenter 
suggestions to use a higher dollar threshold, such as $1 million, or a 
company-specific benchmark that scales with the size of the company. 
These parameters, together with the bright-line $300,000 threshold, are 
intended to ensure that investors continue to receive relevant 
information about environmental sanctions while also realizing the 
benefits of a more principles-based approach.

D. Risk Factors (Item 105)

    Item 105 requires disclosure of the most significant factors that 
make an investment in the registrant or offering speculative or risky 
and specifies that the discussion should be concise and organized 
logically.\197\ The principles-based requirement further directs 
registrants to explain how each risk affects the registrant or the 
securities being offered, discourages disclosure of risks that could 
apply generically to any registrant, and requires registrants to set 
forth each risk factor under a sub-caption that adequately describes 
the risk.
---------------------------------------------------------------------------

    \197\ Smaller reporting companies are not required to provide 
the information under Item 105 in their Exchange Act filings on Form 
10 [17 CFR 249.210], Form 10-K [17 CFR 249.310], and Form 10-Q [17 
CFR 249.308a].
---------------------------------------------------------------------------

    In proposing amendments to Item 105, we aimed to address the 
lengthy and generic nature of the risk factor disclosure presented by 
many registrants. Although the length and number of risk factors 
disclosed by registrants vary, some recent studies have indicated that 
risk factor disclosures have increased over time.\198\
---------------------------------------------------------------------------

    \198\ For example, one study found that registrants increased 
the length of risk factor disclosures from 2006 to 2014 by more than 
50 percent in terms of word count, compared to the word count in 
other sections of Form 10-K that increased only by about ten 
percent, and that this increase in risk factor word count may not be 
associated with better disclosure. See Anne Beatty et al., Are Risk 
Factor Disclosures Still Relevant? Evidence from Market Reactions to 
Risk Factor Disclosures Before and After the Financial Crisis, 36 
Contemp. Acct. Res., 805 (2019). To examine the ``informativeness'' 
of risk factor disclosures, the authors of this study analyzed risk 
factor disclosures about financial constraints and argue that as 
litigation risk increased during and after the 2008 financial 
crisis, registrants were more likely to disclose immaterial risks, 
resulting in a deterioration of disclosure quality.
---------------------------------------------------------------------------

    The inclusion of generic, boilerplate risks that could apply to any 
offering or registrant appears to contribute to the increased length of 
risk factor disclosure. Although Item 105 instructs registrants not to 
present risks that could apply generically to any registrant, and 
despite longstanding Commission and staff guidance stating that risk 
factors should be focused on the ``most significant'' risks and should

[[Page 63743]]

not be boilerplate,\199\ it is not uncommon for companies to include 
generic risks. Registrants often disclose risk factors that are similar 
to those used by others in their industry without tailoring the 
disclosure to their circumstances and particular risk profile.
---------------------------------------------------------------------------

    \199\ See, e.g., Plain English Disclosure, Release No. 33-7497 
(Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)] (``Plain English 
Disclosure Adopting Release''). See also Updated Staff Legal 
Bulletin No. 7: Plain English Disclosure (June 7, 1999), available 
at https://www.sec.gov/interps/legal/cfslb7a.htm.
---------------------------------------------------------------------------

    To address these concerns, we proposed the following amendments to 
the Item 105 risk factor disclosure requirement.
1. Summary Risk Factor Disclosure if the Risk Factor Section Exceeds 15 
Pages
a. Proposed Amendment
    As a way of addressing the length of risk factor disclosure, the 
Commission has previously considered requiring a page limit for risk 
factor disclosure.\200\ However, comments received in response to prior 
initiatives have dissuaded the Commission from adopting such a 
requirement. For example, while the Concept Release did not seek 
specific feedback on reducing or limiting the length of risk factor 
disclosure, several commenters on the Concept Release nonetheless 
opposed a page limit.\201\ Commenters on the Concept Release attributed 
the growing length of risk factor disclosure to the fear of litigation 
for failing to disclose risks if events turn negative.\202\ Similar 
comments were received in response to the Disclosure Effectiveness 
Initiative's general solicitation of comment.\203\
---------------------------------------------------------------------------

    \200\ For example, as part of the Plain English Disclosure 
rulemaking, the Commission solicited comment on whether to limit 
risk factor disclosure to a specific number of risk factors or a 
specific number of pages. See Plain English Disclosure, Release No. 
33-7380 (Jan. 14, 1997), [62 FR 3152, 3163 (Jan. 21, 1997)]. The 
Commission ultimately did not adopt such limits on risk factor 
disclosure in that rulemaking. See Plain English Disclosure Adopting 
Release, 63 FR at 6372.
    \201\ See Proposing Release, supra note 3, at 44375.
    \202\ See id.
    \203\ See id.
---------------------------------------------------------------------------

    Given the increasing length of risk factor disclosure and after 
considering the feedback on the Concept Release, we proposed to amend 
Item 105 to require summary risk factor disclosure in the forepart of 
the document if the risk factor section exceeds 15 pages.
b. Comments on the Proposed Amendment
    Several commenters supported the proposal to require summary risk 
factor disclosure.\204\ One commenter stated that a summary would 
enhance readability and make documents containing risk factor 
disclosure more user-friendly and recommended a lower threshold based 
on investor-testing.\205\ Another commenter recommended that summary 
risk factor disclosure should be required for all registrants.\206\
---------------------------------------------------------------------------

    \204\ See, e.g., letters from CII, E&Y, Better Markets, CCMC, 
CFA Institute and David Young.
    \205\ See letter from Better Markets.
    \206\ See letter from CFA Institute.
---------------------------------------------------------------------------

    A number of commenters opposed the proposal.\207\ Several of these 
commenters expressed concern that investors may focus only on the risk 
factor summary, which may give them an imprecise understanding of the 
risks.\208\ A few commenters stated that the proposed risk factor 
summary would not enhance the readability of the document.\209\ One of 
these commenters suggested that the risk factor summary could result in 
investors discounting the full risk factor presentation.\210\ Another 
commenter stated that registrants would provide lengthy summaries of 
their risks out of concern about the potential liability for any 
omissions in their disclosure.\211\ Other commenters stated that 
grouping similar risk factors and including subheadings would achieve 
the objective of enhancing the readability of risk factors, making a 
summary duplicative.\212\
---------------------------------------------------------------------------

    \207\ See, e.g., letters from CalPERS, International Bancshares, 
Society, Nareit, UnitedHealth Group, CLA, ICGN, DP&W, and FEI.
    \208\ See, e.g., letters from IBC, ICGN, Society, CLA and FEI.
    \209\ See letters from Society and DP&W.
    \210\ See letter from DP&W.
    \211\ See letter from Nareit.
    \212\ See, e.g., letters from UnitedHealth Group, Nareit, and 
Society.
---------------------------------------------------------------------------

    Several commenters emphasized that many registrants decide to 
provide lengthy risk factor disclosure because they believe this will 
help limit their legal exposure.\213\ One of these commenters stated 
that many registrants have risk factors that exceed 15 pages in order 
to provide adequate disclosure about risks that are important for 
investors to be aware of and to limit legal exposure.\214\ This 
commenter stated that a risk factor summary would not include the 
appropriate level of detail necessary to understand fully a 
registrant's risk factors and could open up companies to potential 
litigation. Another commenter stated that the proposal would not 
eliminate boilerplate disclosure.\215\ One commenter recommended that 
summary risk factor disclosure be optional.\216\
---------------------------------------------------------------------------

    \213\ See, e.g., letters from CCMC, FEI and Allen Huang 
(``Huang'').
    \214\ See letter from FEI.
    \215\ See letter from ICGN.
    \216\ See letter from UnitedHealth Group.
---------------------------------------------------------------------------

    Another commenter expressed concern that the proposal to require 
registrants to summarize the ``principal'' risk factors would 
effectively require registrants to rank their risk factors, which some 
registrants may find difficult.\217\ Yet another commenter expressed 
concern that providing summary risk factor disclosure could be 
burdensome on registrants and stated that the proposal could discourage 
some companies from going public.\218\
---------------------------------------------------------------------------

    \217\ See letter from Nareit.
    \218\ See letter from Society.
---------------------------------------------------------------------------

c. Final Amendment
    We are adopting the amendments substantially as proposed with a 
modification in response to comments received. Under the final 
amendments, if a registrant's risk factor disclosure exceeds 15 pages, 
Item 105(b) will require in the forepart of the document a series of 
concise, bulleted or numbered statements summarizing the principal 
factors that make an investment in the registrant or offering 
speculative or risky.\219\ We believe specifying this format for the 
risk factor summary will avoid concerns that the requirement could lead 
to lengthy summaries or result in investors discounting the full risk 
factor presentation. In a change from the proposal, and for similar 
reasons, the final amendments limit the risk summary to no more than 
two pages. We believe that imposing a page limit on the risk summary 
should lessen the burden of preparing the summary and also act as an 
incentive for registrants to give due consideration to the risk factors 
that are material to investors. Because the risk summary is not 
required to contain all of the risk factors identified in the full risk 
factor discussion, registrants may prioritize certain risks and omit 
others. Nonetheless, we believe that a summary of the principal risks 
will help investors navigate lengthy risk factor disclosure that 
exceeds 15 pages and enhance the readability and usefulness of the

[[Page 63744]]

disclosure for investors. We also note that the requirement to provide 
a risk factor summary may create an incentive for registrants to reduce 
the length of their risk factor discussion to avoid triggering the 
summary requirement, to the extent that such an incentive outweighs 
perceived litigation risks.
---------------------------------------------------------------------------

    \219\ Item 3(b) to Form S-11 [17 CFR 239.18] includes such a 
requirement, stating that where appropriate to a clear understanding 
by investors, an introductory statement shall be made in the 
forepart of the prospectus, in a series of short, concise 
paragraphs, summarizing the principal factors which make the 
offering speculative. The risk factor summary included in a Form S-
11 filing typically consists of a series of bulleted or numbered 
statements comprising no more than one page on average. Given our 
experience with this format in the Form S-11 context, we think it 
provides an appropriate model for the summary risk factor 
presentation required under the final amendments.
---------------------------------------------------------------------------

    With respect to commenters' concerns that the risk factor summary 
would require registrants to rank their risk factors or would not 
include the appropriate level of detail necessary to fully understand a 
registrant's risks and could subject companies to potential 
litigation,\220\ we note that the final amendment is similar to other 
disclosure requirements under our rules that require disclosure of a 
summary.\221\ Based on Commission staff experience with those rules, we 
believe that a summary will not detract from a registrant's more 
extensive disclosure elsewhere in a filing or subject a registrant to 
greater litigation risk. Instead, we believe a summary will enhance the 
ability of investors to process relevant information and will focus 
registrants on disclosing material risks.
---------------------------------------------------------------------------

    \220\ See letters from FEI and Nareit.
    \221\ See, e.g., Item 3(b) to Form S-11 and the optional summary 
in Item 16 to Form 10-K.
---------------------------------------------------------------------------

    Finally, although some commenters suggested a lower threshold for 
triggering the summary risk factor disclosure or requiring the summary 
in all instances,\222\ we continue to believe that the 15-page 
threshold is an appropriate threshold. Based on an analysis of filings, 
Commission staff estimates that the 15-page threshold would affect 
approximately 40 percent of filers.\223\ Thus, if registrants maintain 
the same length of their risk factor disclosure, the final amendments 
will result in summary risk factor disclosure being provided in a 
significant number of filings, without imposing undue costs on 
registrants with less complex risk profiles.
---------------------------------------------------------------------------

    \222\ See, e.g., letter from Better Markets.
    \223\ See Proposing Release, supra note 3, at 44382-44383.
---------------------------------------------------------------------------

2. Replace the Requirement To Disclose the ``Most Significant'' Factors 
With the ``Material'' Factors
a. Proposed Amendment
    Since the Commission first published guidance on risk factor 
disclosure in 1964,\224\ it has underscored that risk factor disclosure 
should be focused on the ``most significant'' or ``principal'' factors 
that make a registrant's securities speculative or risky.\225\ 
Notwithstanding this additional guidance, the length of risk factor 
disclosure and the number of risks disclosed has increased in recent 
years.
---------------------------------------------------------------------------

    \224\ See Guides for Preparation and Filing of Registration 
Statements, Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490 (Feb. 15, 
1964)] (``1964 Guides'').
    \225\ ``Principal'' was the term used in the 1982 Integrated 
Disclosure Adopting Release and ``most significant'' was the term 
used in the Plain English Disclosure Adopting Release.
---------------------------------------------------------------------------

    We proposed to amend Item 105 to change the standard for disclosure 
from the ``most significant'' risks to ``material'' risks \226\ to 
focus registrants on disclosing the risks to which reasonable investors 
would attach importance in making investment or voting decisions.
---------------------------------------------------------------------------

    \226\ Securities Act Rule 405 [17 CFR 230.405] and Exchange Act 
Rule 12b-2 [17 CFR 240. 12b-2] both generally define materiality as 
information to which there is a substantial likelihood that a 
reasonable investor would attached important in it investment 
decision.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendment
    Comments on this proposal were generally supportive. Many 
commenters expressed support for replacing the requirement to discuss 
the ``most significant'' risks with ``material'' risks.\227\ Some 
commenters stated that changing to a materiality standard would 
significantly enhance the informative value of this disclosure.\228\ 
Another commenter stated that this proposal could reduce or eliminate 
generic risk factors.\229\ A different commenter conditionally 
supported the proposal, recommending that we revise the definition of 
``material'' to include ``information in which there is a substantial 
likelihood that disclosure of the omitted fact would have been viewed 
by a reasonable investor as having significantly altered the total mix 
of information available in deciding how to vote or make an investment 
decision.'' \230\ This commenter expressed concern that the current 
definition excludes consideration of voting decisions.
---------------------------------------------------------------------------

    \227\ See, e.g., letters from Harper Ho, Burton, NYC Bar 
Association, GRI, IBC, Better Markets, Nareit, David Young, Nasdaq, 
CFA Institute and Humane Society.
    \228\ See, e.g., letters from IBC and David Young.
    \229\ See letter from Nasdaq.
    \230\ See letter from CII. Cf. letter from CalPERS (requesting 
that the Commission clarify and simplify the definition of 
materiality and use ``the definition for materiality that is used in 
Regulation S-X. Under Regulation S-X, Rule 1-02(0), material, when 
used to qualify a requirement for the furnishing of information as 
to any subject, limits the information required to those matters 
about which an average prudent investor ought reasonably to be 
informed.'').
---------------------------------------------------------------------------

    A few commenters opposed the proposed amendment.\231\ One of these 
commenters stated that the other proposed amendments to Item 105 would 
adequately address the increase in risk factor disclosure without the 
need to revise the current disclosure standard.\232\ Another commenter 
stated that registrants are subject to litigation over immaterial 
misstatements or omissions and suggested that, therefore, registrants 
may prepare their risk factors to address many risks, including risks 
that are not material.\233\ This commenter further expressed concern 
that a change from the current disclosure standard could create a 
presumption of materiality in the risk factor section that could lead 
to some registrants choosing to disclose fewer risks.
---------------------------------------------------------------------------

    \231\ See, e.g., letters from CCMC, AFL-CIO and Chevron.
    \232\ See letter from AFL-CIO.
    \233\ See letter from CCMC.
---------------------------------------------------------------------------

    Other commenters stated that changing the disclosure standard from 
``most significant'' to ``material'' would likely not meaningfully 
reduce the amount of risk factor disclosures in filings.\234\ One 
commenter recommended that registrants should be required to disclose 
cybersecurity risk.\235\
---------------------------------------------------------------------------

    \234\ See, e.g., letters from Chevron and FEI.
    \235\ See letter from Better Markets.
---------------------------------------------------------------------------

c. Final Amendment
    After considering the comments, we are adopting the amendment as 
proposed. Under the final amendment, registrants will be required to 
disclose the material factors that make an investment in the registrant 
or offering speculative or risky. We believe that the final amendment 
will result in risk factor disclosure that is more tailored to the 
particular facts and circumstances of each registrant, which should 
reduce the disclosure of generic risk factors and potentially shorten 
the length of the risk factor discussion, to the benefit of both 
investors and registrants.\236\ Consistent with this principles-based 
approach, we are not adding a specific requirement to disclose 
cybersecurity risk as recommended by a commenter.\237\ Although certain 
commenters expressed concerns about the use of the term ``material,'' 
\238\ we do not believe that the use of that term would be too narrow 
or would lead to the disclosure of fewer risks. Materiality is a broad 
concept that encompasses both investment and voting decisions. As the 
Commission explained in the Concept Release, the concept of materiality 
is used throughout the federal securities laws. The Supreme Court has 
held that

[[Page 63745]]

information is material if there is a substantial likelihood that a 
reasonable investor would consider the information important in 
deciding how to vote or make an investment decision.\239\ The Court 
further explained that information is material if there is a 
substantial likelihood that disclosure of the omitted fact would have 
been viewed by the reasonable investor as having significantly altered 
the ``total mix'' of information available.\240\ The term ``material'' 
as used in the final amendments to Item 105, as well as in the 
amendments to Items 101 and 103, is defined under Rule 12b-2 of the 
Exchange Act and Rule 405 of the Securities Act. As the Commission has 
previously stated, the definitions of ``material'' in Rule 12b-2 and 
Rule 405 are consistent with the Supreme Court's holding in TSC 
Industries.\241\
---------------------------------------------------------------------------

    \236\ At the same time, we do not expect the final amendment 
will discourage registrants from disclosing material risks that 
would enable investors to make informed investment decisions.
    \237\ See letter from Better Markets.
    \238\ See, e.g., letters from CCMC, CII and CalPERS.
    \239\ See Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) 
quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 
(1976). In TSC Industries, the Supreme Court adopted a standard for 
materiality in connection with proxy statement disclosure under 
Schedule 14A and Rule 14a-9 of the Exchange Act. 426 U.S. at 449 at 
n. 10. ( [T]he SEC's view of the proper balance between the need to 
insure adequate disclosure and the need to avoid the adverse 
consequences of setting too low a threshold for civil liability is 
entitled to consideration [and] [t]he standard we adopt is supported 
by the SEC.'').
    \240\ See Matrixx Initiatives, Inc. v. Siracusano, 131 U.S. 
1309, 1318 (2011) quoting TSC Industries, 426 U.S. at 449). In 
Matrixx Initiatives, the Court applied the materiality standard, as 
set forth in TSC Industries and Basic. In articulating these 
standards, the Supreme Court recognized that setting too low of a 
materiality standard for purposes of liability could cause 
management to ``bury shareholders in an avalanche of trivial 
information.'' Id. at 1318 (quoting TSC Industries, 426 U.S. at 448-
449).
    \241\ See Concept Release, supra note 9, at 23926; see also, 
MD&A Release supra note 32.
---------------------------------------------------------------------------

3. Require Registrants To Organize Risk Factors Under Relevant Headings
a. Proposed Amendment
    Since 1964, the Commission has periodically emphasized the 
importance of organized and concise risk factor disclosure.\242\ Most 
recently, in the Concept Release, the Commission solicited public input 
on ways in which we could improve the organization of registrants' risk 
factor disclosure to help investors better navigate the 
disclosure.\243\
---------------------------------------------------------------------------

    \242\ See, e.g., 1964 Guides, supra note 224; 1982 Integrated 
Disclosure Adopting Release, supra note 174; and Securities Offering 
Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 
2005)].
    \243\ See Concept Release, supra note 9, at 23956.
---------------------------------------------------------------------------

    After considering the comments received on the Concept Release, we 
proposed to amend Item 105 to require registrants to organize their 
risk factor disclosure under relevant headings in addition to the 
subcaptions that are currently required. In addition, the proposed 
amendments would require registrants to present risks that could apply 
to any registrant or any offering at the end of the risk factor section 
under a separate caption entitled ``General Risk Factors.'' The 
proposed amendments were intended to improve the organization of risk 
factor disclosure in an effort to help readers comprehend lengthy risk 
factor disclosures.
b. Comments on the Proposed Amendment
    Many commenters supported organizing risk factors under relevant 
headings.\244\ Several commenters stated that this proposal would make 
risk factor disclosure more user-friendly and improve the readability 
of this disclosure.\245\ One commenter stated that the proposal would 
enable investors to more easily discern those risk factors that are 
more general in nature.\246\ Other commenters stated that many 
registrants already categorize their risk factors.\247\
---------------------------------------------------------------------------

    \244\ See, e.g., letters from UnitedHealth Group, CII, AGA and 
EEI, Better Markets, Society, BCI, Nareit, CCMC, FEI, Chevron, NYC 
Bar Association, CFA Institute and Nasdaq.
    \245\ See, e.g., letters from CII, Better Markets, Society, 
Nareit, Chevron and Nasdaq.
    \246\ See letter from UnitedHealth Group.
    \247\ See, e.g., letters from AGA and EEI, Society and Nasdaq.
---------------------------------------------------------------------------

    Some commenters opposed organizing risk factors under relevant 
headings.\248\ One commenter stated that organizing risk factors under 
relevant headings could result in less investor-friendly disclosure 
because it would preclude the practice that many registrants currently 
employ, which is to organize risks in order of materiality.\249\ This 
commenter stated that registrants should have the flexibility to 
organize risk factors in a way that a registrant believes is most 
useful to investors.
---------------------------------------------------------------------------

    \248\ See, e.g., letters from GM and PRI.
    \249\ See letter from GM. But see letter from Society (opposing 
any amendment to require risk factor prioritization on the basis 
that it would be unduly burdensome and conflict with the proposal to 
organize risk factors under relevant headings).
---------------------------------------------------------------------------

    Comments were mixed on the proposed amendment to require 
registrants to disclose generic risk factors at the end of the risk 
factor section under a separate ``General Risk Factors'' caption. A 
number of commenters agreed with the proposed amendment.\250\ Several 
commenters, however, opposed this aspect of the proposal, or expressed 
concern about it.\251\ Some of these commenters stated that this 
proposal has the potential to undermine the existing ways registrants' 
categorize risk factors.\252\ One commenter expressed concern that this 
amendment creates a second-class tier of risk factors that investors 
might automatically perceive as less important simply due to their 
different characterization and that such a result is counter to the 
notion of risk factors generally.\253\
---------------------------------------------------------------------------

    \250\ See, e.g., letters from CII, David Young, CFA Institute, 
and FEI.
    \251\ See, e.g., letters from AGA and EEI, Society, BCI, NYC Bar 
Association, Nasdaq, and Huang.
    \252\ See, e.g., letters from AGA and EEI and Society.
    \253\ See letter from Society.
---------------------------------------------------------------------------

    Another commenter stated that registrants use risk factor 
disclosure to satisfy the ``meaningful cautionary language'' required 
by the safe harbor provision of the PSLRA,\254\ and expressed concern 
that classifying some risk factors as generic could potentially 
disqualify this disclosure as ``meaningful cautionary language'' in 
securities class action lawsuits and potentially increase the 
litigation risk to registrants.\255\ This commenter also asserted that 
if registrants are required to disclose generic risk factors at the end 
of the risk factor section, they may caption most or all as specific 
risk factors or curtail their forward-looking disclosure in MD&A due to 
higher litigation risks.
---------------------------------------------------------------------------

    \254\ Public Law 104-67, 109 Stat. 737 (1995) codified as 
amended in scattered sections of 15 U.S.C.
    \255\ See letter from Huang.
---------------------------------------------------------------------------

    A few commenters expressed concern that it could be difficult for 
registrants to differentiate risks as ``specific'' or ``general.'' 
\256\ These commenters recommended that if we were to adopt this 
revision, the final amendments would have to be clearer as to what 
qualifies as a ``General Risk Factor'' in order to enable registrants 
to apply the rule consistently and avoid mischaracterization of risks.
---------------------------------------------------------------------------

    \256\ See, e.g., letters from AGA and EEI and Society.
---------------------------------------------------------------------------

    In the Proposing Release, we also requested comment on whether Item 
105 should be amended to require registrants to prioritize the order in 
which they discuss their risk factors so that the more significant 
risks to the registrant are discussed first. Several commenters 
supported requiring registrants to prioritize the risk factors to 
discuss more significant risks first.\257\ One commenter opposed 
requiring registrants to prioritize risk factors in this manner.\258\ 
This commenter noted that many risk factors deal with evolving or 
uncertain circumstances that are unknown or difficult to quantify, and 
requiring registrants to

[[Page 63746]]

evaluate and rank often equally significant and evolving risk factors 
will add burden, increase costs, take time and effort from other 
efforts, and create liability concerns based on how the factors are 
prioritized.
---------------------------------------------------------------------------

    \257\ See, e.g., letters from CII, BCI and CCMC.
    \258\ See letter from Society.
---------------------------------------------------------------------------

    In addition, we requested comment on whether we should require 
registrants to explain how generic, boilerplate risk factors are 
material to their investors, and what, if anything, management does to 
address these risks. One commenter, suggesting that this would lead to 
more useful disclosure for investors, supported such a 
requirement.\259\ Another commenter recommended that we require risk 
factor disclosure to be specific to the registrant and exclude generic 
statements that apply to all or most registrants.\260\
---------------------------------------------------------------------------

    \259\ See letter from PRI.
    \260\ See letter from CFA Institute.
---------------------------------------------------------------------------

c. Final Amendment
    After considering the public comments, we are adopting the 
amendment as proposed. Amended Item 105 will require registrants to 
organize their risk factor disclosure under relevant headings, in 
addition to the subcaptions that are currently required. The final 
amendments, except as described below, do not specify risk factor 
headings that registrants should use. As noted above, many registrants 
already organize their risk factor disclosure through groupings of 
related risk factors and the use of headings. We believe that requiring 
this type of organization for all registrants will improve the 
readability and usefulness of this disclosure. In addition, the final 
amendments will require registrants to present risks that could apply 
generally to any company or offering of securities at the end of the 
risk factor section under the caption ``General Risk Factors.'' We are 
not adopting a requirement for registrants to explain how generic, 
boilerplate risk factors are material and how management addresses 
these risks, as suggested by one commenter.\261\ We believe such 
disclosures would be largely redundant to the current requirement under 
Item 105 that registrants explain how a risk affects it or the 
securities being offered. For similar reasons, we do not believe that 
additional clarification is necessary regarding the types of risks that 
would constitute a general risk factor, as suggested by some 
commenters.\262\ Because the existing rule requires registrants to 
explain how a risk affects them, we believe registrants should be well 
positioned to determine the particular nature of a risk. With respect 
to one commenter's concern that grouping some risk factors under a 
``General Risk Factor'' sub-heading could potentially disqualify this 
disclosure from certain statutory safe harbor protections and subject 
registrants to potential litigation, we note that the final amendment 
is solely meant to improve the organization and the effectiveness of 
risk factor disclosures and does not limit the ability of a registrant 
to include appropriate cautionary language with respect to any forward-
looking statements. In our view, if a registrant includes one or more 
risk factors under the ``General Risk Factor'' caption, that fact alone 
should not affect the availability of the PSLRA safe harbor. 
Nevertheless, we encourage registrants to tailor their risk factor 
disclosures to emphasize the specific relationship of the risk to the 
registrant or the offering and therefore avoid the need to include the 
risk under the general risk heading.
---------------------------------------------------------------------------

    \261\ See letter from PRI.
    \262\ See, e.g., letters from AGA and EEI and Society.
---------------------------------------------------------------------------

    We continue to believe that the final amendment will help to 
address the lengthy and generic nature of the risk factor disclosure 
presented by many registrants. We agree with commenters that stated 
that the amendments would make risk factor disclosure more user-
friendly and improve the readability of this information.\263\
---------------------------------------------------------------------------

    \263\ See, e.g., letters from CII, Better Markets, Society, 
Nareit, Chevron, and Nasdaq.
---------------------------------------------------------------------------

    The final amendments will not require registrants to prioritize the 
order in which they discuss their risk factors. Although we recognize 
that such prioritization could be useful to users of the disclosure in 
certain circumstances, consistent with our goal to make the item more 
principles based, we believe the amendments should afford registrants 
flexibility to determine the order to most effectively present the 
material risks that make an investment in the registrant or offering 
speculative or risky. Accordingly, if a registrant believes it is 
useful or important to emphasize the relative importance of certain 
risks, it is free to write those risk factors and other disclosures in 
such a way that their relative importance is apparent. Retaining this 
flexibility should also help address concerns expressed by some 
commenters that it could be difficult to evaluate and rank often 
equally significant and evolving risk factors.

III. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\264\ the Office of 
Information and Regulatory Affairs has designated these amendments not 
a ``major rule,'' as defined by 5 U.S.C. 804(2).
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    \264\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    This section analyzes the expected economic effects of the final 
amendments relative to the current baseline, which consists of both the 
regulatory framework of disclosure requirements in existence today and 
the current use of such disclosure by investors. As discussed above, we 
are adopting amendments to modernize and simplify the description of 
business (Item 101), legal proceedings (Item 103), and risk factor 
(Item 105) disclosure requirements in Regulation S-K.\265\ An important 
objective of the final amendments is to revise Items 101(a), 101(c), 
and 105 to be more principles-based. Overall, investors and registrants 
may benefit from the principles-based approach if the existing 
prescriptive requirements result in disclosure that is not material to 
an investment decision and is costly to provide. We acknowledge that 
emphasizing a principles-based approach and granting registrants more 
flexibility to determine what and how much disclosure about a topic to 
provide could result in the

[[Page 63747]]

elimination of some information to investors. However, we believe that 
the cost to investors of any such loss of information will be limited 
given that, under the principles-based approach reflected in the final 
amendments, registrants are required to provide disclosure about these 
topics if that disclosure is material to an understanding of the 
business.
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    \265\ While Items 101, 103 and 105 have not undergone 
significant revisions in over thirty years, many characteristics of 
the registrants that provide these disclosures have changed 
substantially over this time period. For example, in the calendar 
year of 1988, the largest 500 U.S. companies in Standard & Poor's 
Compustat Daily Updates database had an average market 
capitalization of $2.42 billion, foreign income of $219.63 million, 
and ratio of intangible assets to market capitalization of 7.26%. 
The largest 100 companies had an average market capitalization of 
$8.75 billion, foreign income of $601.07 million, and ratio of 
intangible assets to market capitalization of 5.94%. In the calendar 
year of 2019, the largest 500 companies had an average market 
capitalization of $54.98 billion, foreign income of $1.47 billion, 
and ratio of intangible assets to market capitalization of 22.71%. 
The largest 100 companies had an average market capitalization of 
180.78 billion, foreign income of $4.99 billion, and ratio of 
intangible assets to market capitalization of 22.89%. There is also 
significant turnover among the largest companies: Approximately 40% 
of top 50 companies in 1988 were still in the top 50 companies in 
2019. We believe that some of the final amendments (e.g., requiring 
the disclosure of the material effects of compliance with material 
government regulations, including foreign government regulations) 
will provide investors with information consistent with the changing 
nature of these registrants. We note that in the Proposing Release 
we referenced data as of 6/30/1988, while the current release uses 
data as of 12/31/1988.
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    We are sensitive to the costs and benefits of these amendments. The 
discussion below addresses the potential economic effects of the final 
amendments, including the likely benefits and costs, as well as the 
likely effects on efficiency, competition, and capital formation.\266\ 
At the outset, we note that, where possible, we have attempted to 
quantify the benefits, costs, and effects on efficiency, competition, 
and capital formation expected to result from the final amendments. In 
many cases, however, we are unable to quantify the economic effects 
because we lack information necessary to provide a reasonable 
estimate.\267\ For example, we are unable to quantify, with precision, 
the costs to investors of having to rely on alternative information 
sources under each disclosure item and the potential information 
processing cost savings that may arise from the elimination of 
disclosures not material to an investment decision.
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    \266\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and 
Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] require the 
Commission, when engaging in rulemaking where it is required to 
consider or determine whether an action is necessary or appropriate 
in the public interest, to consider, in addition to the protection 
of investors, whether the action will promote efficiency, 
competition, and capital formation. Further, Section 23(a)(2) of the 
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when 
making rules under the Exchange Act, to consider the impact that the 
rules would have on competition, and prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.
    \267\ In response to our request for comment in the Proposing 
Release, no commenter provided us with data or analysis that 
quantified or would allow us to further quantify the economic 
effects of the amendments.
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A. Baseline and Affected Parties

    Our baseline includes the current disclosure requirements under 
Items 101, 103, and 105 of Regulation S-K, which apply to registration 
statements, periodic reports, and certain proxy statements filed with 
the Commission. Thus, the parties that are likely to be affected by the 
final amendments include investors and other users of registration 
statements, periodic reports and proxy statements, such as financial 
analysts, as well as registrants subject to Regulation S-K.
    The final amendments affect both domestic registrants and foreign 
private issuers \268\ that file on domestic forms \269\ and foreign 
private issuers that file on foreign registration forms.\270\ We 
estimate that approximately 6,987 registrants that file on domestic 
forms \271\ and 469 foreign private issuers that file on foreign 
registration forms will be affected by the final amendments. Among the 
registrants that file on domestic forms, approximately 30 percent are 
large accelerated filers, 18.5 percent are accelerated filers, and 51.5 
percent are non-accelerated filers. In addition, we estimate that 43 
percent of domestic registrants are smaller reporting companies and 
approximately 21.1 percent are emerging growth companies.\272\
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    \268\ See supra note 12 for the definition of foreign private 
issuer.
    \269\ The number of registrants that file on domestic forms is 
estimated as the number of unique registrants, identified by Central 
Index Key (CIK), that filed Form 10-K, or an amendment thereto, or 
both a Form 10-Q and a Form S-1, S-3, or S-4 with the Commission 
during calendar year 2019. We believe that these filers are 
representative of the registrants that will be primarily affected by 
the final amendments. For purposes of this economic analysis, these 
estimates do not include registrants that filed only a Securities 
Act registration statement during calendar year 2019, or only a Form 
10-Q not preceded by a Securities Act registration statement, in 
order to avoid including entities, such as certain co-registrants of 
debt securities, which may not have an independent reporting 
obligation and therefore would not be affected by the amendments. We 
believe that most registrants that have filed a Securities Act 
registration statement or a Form 10-Q not preceded by a Securities 
Act registration statement, other than such co-registrants, would be 
captured by this estimate. The estimates for the percentages of 
smaller reporting companies, accelerated filers, large accelerated 
filers, and non-accelerated filers are based on the self-reported 
status provided by these registrants; the data was obtained by 
Commission staff using a computer program that analyzes SEC filings, 
with supplemental data from Ives Group Audit Analytics.
    \270\ The number of affected registrants that file foreign forms 
is estimated as the number of unique companies, identified by 
Central Index Key (CIK), that filed Forms F-1, F-3, and F-4, an 
amendment thereto, or a post-effective amendment to one of those 
forms with the Commission during calendar year 2019. See also supra 
note 12.
    \271\ This number includes fewer than 20 foreign registrants 
that file on domestic forms and approximately 100 business 
development companies.
    \272\ An ``emerging growth company'' is defined, in part, as an 
registrant that had total annual gross revenues of less than $1.07 
billion during its most recently completed fiscal year. See Rule 
405; Rule 12b-2; 15 U.S.C. 77b(a)(19); 15 U.S.C. 78c(a)(80); and 
Inflation Adjustments and Other Technical Amendments under Titles I 
and II of the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 
17545 (Apr. 12, 2017)]. We based the estimate of the percentage of 
emerging growth companies on whether a registrant claimed emerging 
growth company status, as derived from Ives Group Audit Analytics 
data.
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B. Potential Costs and Benefits

    In this section, we discuss the anticipated economic benefits and 
costs of the final amendments. We first analyze the overall economic 
effects of shifting toward a more principles-based approach to 
disclosure, which is one of the main objectives of the final 
amendments. We then discuss the potential costs and benefits of 
specific amendments.
1. Principles-Based Versus Prescriptive Requirements
    Prescriptive requirements employ bright-line, quantitative or other 
thresholds to identify when disclosure is required, or require 
registrants to disclose the same types of information. Principles-based 
requirements, on the other hand, provide registrants with the 
flexibility to determine (i) whether certain information is material, 
and (ii) how to disclose such information.
    In this release, we are amending Items 101(a), 101(c), and 105 to 
be more clearly principles-based.\273\ Principles-based requirements 
may result in more or less detail than prescriptive requirements. The 
economic effects of replacing a prescriptive requirement with a more 
principles-based disclosure standard based on materiality depend on a 
variety of factors, including the preferences of investors, the 
compliance costs of producing the disclosure, and the nature of the 
information to be disclosed.
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    \273\ Although Items 101(c) and Item 105 use a principles-based 
approach, based on comments received on prior initiatives, it 
appears that some registrants have interpreted these Items as 
imposing prescriptive requirements. See supra Sections II.B and 
II.D. Therefore, the final amendments emphasize the principles-based 
approach of these items.
---------------------------------------------------------------------------

    For certain existing disclosure requirements, shifting to a more 
principles-based approach could benefit registrants with no loss of 
investor protection because the current requirements may result in some 
disclosure that is not material to an investment decision and costly 
for registrants to provide. Elimination of disclosure that is not 
material could reduce compliance burdens and potentially benefit 
investors, to the extent it improves the readability and conciseness of 
the information provided and allows investors to focus on information 
that is material to an understanding of the registrant's business.\274\ 
In addition, a principles-

[[Page 63748]]

based approach may permit or encourage registrants to present more 
tailored information, which also may benefit investors.\275\ 
Principles-based requirements generally would elicit disclosure that is 
more in line with the way the registrant's management and its board of 
directors monitor and assess the business and therefore (1) would be 
easier for registrants to prepare using existing metrics and reporting 
mechanisms and (2) would provide investors better insight into the 
decision-making process, current status, and prospects of the 
registrant.
---------------------------------------------------------------------------

    \274\ See Alastair Lawrence, Individual Investors and Financial 
Disclosure, 56 J. Acct. & Econ., 130 (2013). Using data on trades 
and portfolio positions of 78,000 households, this article shows 
that individuals invest more in firms with clear and concise 
financial disclosures. This relation is reduced for high frequency 
trading, financially-literate, and speculative individual investors. 
The article also shows that individuals' returns increase with 
clearer and more concise disclosures, implying such disclosures 
reduce individuals' relative information disadvantage. A one 
standard deviation increase in disclosure readability and 
conciseness corresponds to return increases of 91 and 58 basis 
points, respectively. The article acknowledges that, given the 
changes in financial disclosure standards and the possible advances 
in individual investor sophistication, the extent to which these 
findings, which are based on historical data from the 1990s, would 
differ from those today is unknown. Recent advances in information 
processing technology, such as machine learning for textual 
analysis, may also affect the generalizability of these findings.
    \275\ A number of academic studies have explored the use of 
prescriptive thresholds and materiality criteria. Many of these 
papers highlight a preference for principles-based materiality 
criteria. See, e.g. Eugene A. Imhoff Jr. and Jacob K. Thomas, 
Economic consequences of accounting standards: The lease disclosure 
rule change, 10.4 J. Acct. & Econ. 277 (1988) (providing evidence 
that management modifies existing lease agreements to avoid crossing 
bright-line rules for lease capitalization); Cheri L. Reither, What 
are the best and the worst accounting standards?, 12.3 Acct. 
Horizons 283 (1998) (documenting that due to the widespread abuse of 
bright-lines in rules for lease capitalization, SFAS No. 13 was 
voted the least favorite FASB standard by a group of accounting 
academics, regulators, and practitioners); Christopher P. Agoglia et 
al., Principles-based versus rules-based accounting standards: The 
influence of standard precision and audit committee strength on 
financial reporting decisions, 86 Acct. Rev. 747 (2011) (conducting 
experiments in which experienced financial statement preparers are 
placed in a lease classification decision context and finding that 
preparers applying principles-based accounting are less likely to 
make aggressive reporting decisions than preparers applying a more 
prescriptive standard and supporting the notion that a move toward 
principles-based accounting could result in better financial 
reporting); Usha Rodrigues and Mike Stegemoller, An inconsistency in 
SEC disclosure requirements? The case of the ``insignificant'' 
private target, 13 J. Corp. Fin. 251 (2007) (providing evidence, in 
the context of mergers and acquisitions, where prescriptive 
thresholds deviate from investor preferences). Studies highlighting 
a preference for prescriptive disclosure standards are discussed 
below. See infra note 14.
---------------------------------------------------------------------------

    On the other hand, shifting to a more principles-based approach may 
result in the elimination of previously prescriptive disclosure that is 
material to an investment decision if registrants misjudge what 
information is material to investors.\276\ In this regard, to the 
extent that prescriptive requirements result in an improved mix of 
information, such requirements could benefit investors and may also 
benefit registrants by improving stock market liquidity and decreasing 
cost of capital.\277\ Further, prescriptive standards could enhance the 
comparability and verifiability of information, but those benefits may 
be limited (or impose costs) if the specified metrics result in 
comparisons that are not appropriate due to differences between or 
among registrants.\278\ We acknowledge, however, that differences 
between principles-based standards and prescriptive standards have 
often been studied in the financial reporting context. These 
differences may be narrower in the context of the final amendments due 
to the qualitative nature of the disclosures in Items 101(a), 101(c), 
and 105. Prescriptive requirements also may be easier to apply and 
therefore less costly for registrants as they involve fewer judgments 
than principles-based requirements.
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    \276\ The presence of other controls, including corporate 
internal controls and board oversight, likely reduces the risk that 
registrants will misjudge what information is material.
    \277\ See, e.g., Christian Leuz and Peter Wysocki, The Economics 
of Disclosure and Financial Reporting Regulation: Evidence and 
Suggestions for Future Research, 54 J. Acct. Res. 525 (2016) 
(surveying the empirical literature on the economic consequences of 
disclosure and discussing potential capital-market benefits from 
disclosure and reporting, such as improved market liquidity and 
decreased cost of capital).
    \278\ See Mark W. Nelson, Behavioral evidence on the effects of 
principles-and rules-based standards, 17 Acct. Horizons 91 (2003); 
and Katherine Schipper, Principles-based accounting standards, 17 
Acct. Horizons 61 (2003) (noting potential advantages of 
prescriptive accounting standards, including: Increased 
comparability among firms, increased verifiability for auditors, and 
reduced litigation for firms). See also Randall Rentfro and Karen 
Hooks, The effect of professional judgment on financial reporting 
comparability, 1 J. Acct. Fin. Res. 87 (2004) (finding that 
comparability in financial reporting may be reduced under 
principles-based standards, which rely more heavily on the exercise 
of professional judgment, but noting that comparability may improve 
as financial statement preparers become more experienced and hold 
higher organizational rank); Andrew A. Acito et al., The Materiality 
of Accounting Errors: Evidence from SEC Comment Letters, 36 Contemp. 
Acct. Res. 839 (2019) (studying managers' responses to SEC inquiries 
about the materiality of accounting errors and finding that managers 
are inconsistent in their application of certain qualitative 
considerations and may omit certain qualitative considerations from 
their analysis that weigh in favor of an error's materiality). In 
addition, while we did not solicit comment on the submission format 
of the Item 101, 103, and 105 disclosures in the proposal, some 
commenters stated that the disclosures would be more useful to 
investors if they were submitted in a machine-readable format, 
citing comparability and searchability as among the benefits of such 
a format. See letters from CFA Institute, Better Markets, the 
California State Teachers' Retirement System (CalSTRS), and XBRL US 
(with the latter two specifically recommending the Inline XBRL 
format). The submission format of the Item 101, 103, and 105 
disclosures is outside the scope of this rulemaking.
---------------------------------------------------------------------------

    In addition, some of the potential costs of shifting to a more 
principles-based approach could be mitigated by external disciplines, 
such as the Commission staff's filing review program and the 
registrant's engagement with investors.\279\ In addition, registrants 
will remain subject to the antifraud provisions of the securities 
laws.\280\ There also may be incentives for registrants to voluntarily 
disclose additional information if the benefits to registrants of 
reduced information asymmetry exceed the disclosure costs.
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    \279\ Under Regulation FD, material information provided to any 
investor, for example, through investor outreach activities, would 
be required to be made publicly available. See 17 CFR 243.100 et 
seq.
    \280\ See, e.g., Exchange Act Rule 10b-5(b) [17 CFR 240.10b-
5(b)].
---------------------------------------------------------------------------

    Differences between the principles-based and prescriptive 
approaches are likely to vary across registrants, investors, and 
disclosure topics. Despite potential costs associated with replacing 
prescriptive requirements with principles-based requirements, the shift 
is likely to reduce overall compliance costs because registrants will 
have the flexibility to determine whether certain information is 
material under the principles-based approach. To the extent the 
principles-based approach reduces compliance costs, the cost reduction 
should be more beneficial to smaller registrants that are financially 
constrained. In addition, as noted above, prescriptive requirements may 
create information asymmetries if investors are left to rely on 
disclosure of measures that are not relevant to the way a registrant's 
management and board of directors are operating and assessing the 
business. Although eliminating information that is not material should 
benefit all investors, it could benefit retail investors more to the 
extent they are less likely to have the time and resources to devote to 
reviewing and evaluating disclosure. At the same time, smaller 
registrants with less established reporting histories may be the most 
at risk of persistent information asymmetries if the principles-based 
approach results in reduction or loss of information that is material 
to investors. In the event of reduction or loss of information that is 
material (the risk of which, as noted above, is offset by mitigants 
including corporate internal controls and the antifraud provisions of 
the securities laws), retail investors in these registrants may be more 
negatively affected than institutional investors

[[Page 63749]]

because obtaining information from alternative sources could involve 
monetary costs, such as database subscriptions, or opportunity costs, 
such as time spent searching for alternative sources. Retail investors 
may not be able or willing to incur these costs.
    Across different disclosure topics, the principles-based approach 
may be more appropriate for topics where the relevant information tends 
to vary greatly across companies, because, in these situations, the 
more standardized prescriptive requirements are less likely to elicit 
information that is tailored to a specific company. A principles-based 
approach may also be more appropriate for disclosures that are episodic 
in nature, because investors may derive relatively less value from 
comparisons of such disclosure for a given registrant over time. In 
addition, registrants may derive relatively less benefit from applying 
a standardized prescriptive approach to episodic disclosures, which may 
be less amenable to routinized reporting than periodic disclosures of 
information that arise on a regular basis.
2. Benefits and Costs of Specific Amendments
    We expect the final amendments will result in costs and benefits to 
registrants and investors, and we discuss those costs and benefits 
qualitatively, item by item, in this section. The changes to each item 
will affect the compliance burden for registrants in filing particular 
forms. Overall, we expect the net effect of the final amendments on a 
registrant's compliance burden to be limited. The quantitative 
estimates of changes in those burdens for purposes of the Paperwork 
Reduction Act are further discussed in Section V. As explained in the 
item-by-item discussion of the final amendments in this section, we 
expect certain aspects of the final amendments to increase compliance 
burdens and others to decrease the burdens. Taken together, we estimate 
that the final amendments are likely to result in a net decrease of 
between three and five burden hours per form for purposes of the 
Paperwork Reduction Act.\281\
---------------------------------------------------------------------------

    \281\ See infra Section V.B.
---------------------------------------------------------------------------

i. General Development of Business (Item 101(a))
    Item 101(a) requires a description of the general development of 
the registrant's business, such as the year in which the registrant was 
organized and the nature and results of any merger of the registrant or 
its significant subsidiaries. Some academic research has found that 
information required under Item 101(a) is relevant to firm value. For 
example, the registrant's age can, to some extent, predict its future 
growth rates \282\ and corporate innovation.\283\ Similarly, merger 
activities can affect shareholder value and predict future 
performance.\284\ Given the relevance of such information to firm 
value, and thus investors, the effects of the final amendments to Item 
101(a) on investors will depend on whether they result in more concise 
and material disclosures of business development information under Item 
101(a).\285\
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    \282\ See David S. Evans, The Relationship between Firm Growth, 
Size, and Age: Estimates for 100 Manufacturing Industries, 35 J. 
Indus. Econ. 567 (1987) (finding that firm growth decreases with 
both firm size and age). See also Costas Arkolakis et al., Firm 
Learning and Growth, 27 Rev. Econ. Dynamics 146 (2018) (developing a 
theoretical model showing that firm growth rates decrease with firm 
age and calibrating the model using plant-level data).
    \283\ See Elena Huergo and Jordi Jaumandreu, How Does 
Probability of Innovation Change with Firm Age? 22 Small Bus. Econ. 
193 (2004) (finding that, as a firm's age increases, the innovation 
rate diminishes and attributing this finding to the rapid innovation 
necessary for a firm to compete when entering a market); Alex Coad 
et al., Innovation and Firm Growth: Does Firm Age Play a Role?, 45 
Res. Pol'y 387 (2016) (finding that young firms undertake riskier 
innovation and receive larger benefits from research and 
development).
    \284\ See Sara B. Moeller et al., Wealth Destruction on a 
Massive Scale? A Study of Acquiring-Firm Returns in the Recent 
Merger Wave, 60 J. Fin. 757 (2005) (finding that, although small 
gains were made in the 1980s, investors experienced negative gains 
from 1998 to 2001, and firms that announced acquisitions with large 
dollar losses performed poorly afterwards); see also Ran Duchin and 
Breno Schmidt, Riding the Merger Wave: Uncertainty, Reduced 
Monitoring, and Bad Acquisitions, 107 J. Fin. Econ. 69 (2013) 
(finding that the average long-term performance of acquisitions 
initiated during merger waves is significantly worse than those 
initiated at other times).
    \285\ Investors may benefit from more concise disclosure that 
facilitates their ability to focus on information material to an 
investment decision. See supra note 274.
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    The final amendments will revise the requirements in Item 101(a) to 
be more clearly principles-based, requiring disclosure of information 
material to an understanding of the general development of the 
registrant's business. The shift to a more clearly principles-based 
approach for these requirements will give rise to the potential 
economic effects discussed in Section IV.B.1 above.
    Currently, Item 101(a) requires registrants to describe their 
business development during the past five years, or such shorter period 
as the registrant may have engaged in business. The final amendments 
will eliminate the prescribed five-year timeframe for this disclosure. 
Eliminating this specific requirement will provide registrants with 
flexibility to choose a different timeframe that is more relevant in 
describing their business development to investors. For example, a long 
timeframe might be less appropriate for registrants operating in 
rapidly changing environments where historical information becomes 
irrelevant in a short period of time. Given that registrants will have 
the flexibility to determine the appropriate timeframe, this amendment 
is expected to reduce compliance costs. Investors may also benefit if 
the timeframe chosen by a registrant is more consistent with their 
preferences than the prescribed five-year timeframe, but may be 
burdened if the timeframe chosen by the registrant is less consistent 
with their preferences than the prescribed five-year timeframe.
    Currently, Item 101(a) requires registrants to describe their 
business development in registration statements and annual reports. For 
filings subsequent to the initial registration statement, the final 
amendments to Item 101(a)(1) will allow registrants to provide only an 
update of this disclosure and incorporate by reference the previous 
discussion of the general development of its business included in the 
registrant's most recently filed registration statement or report 
containing that discussion. Together, the update and the incorporated 
disclosure will present a complete discussion of the general 
development of its business.\286\ If duplicative disclosure distracts 
investors from other important information, the amendments may benefit 
investors by highlighting all of the material developments that have 
occurred since the most recent full discussion of the general 
development of the registrant's business. However, to the extent that 
historical information will be available through hyperlinking as 
opposed to being in the same filing, investors will have to spend more 
time to retrieve the information from another disclosure document.
---------------------------------------------------------------------------

    \286\ A registrant will be required to incorporate by reference 
the earlier disclosure into the updated filing. See supra Section 
II.A.2. We are also adopting a similar amendment to Item 101(h), 
which applies to smaller reporting companies.
---------------------------------------------------------------------------

    Some commenters stated that the use of hyperlinks to update 
material developments would lead to a disjointed narrative and hamper 
readability.\287\ Because the final amendments will allow only one 
hyperlink instead of multiple hyperlinks, we believe that any increase 
in retrieval costs for investors will be minimal. A few commenters 
objected to prohibiting the use of multiple

[[Page 63750]]

hyperlinks.\288\ We believe, however, that retrieval costs for 
investors may increase quickly with the number of hyperlinks because 
each additional hyperlink increases the risk of broken or inactive 
hyperlinks, and a disjointed narrative would not be reader-friendly.
---------------------------------------------------------------------------

    \287\ See supra note 37 and corresponding text.
    \288\ See id.
---------------------------------------------------------------------------

    While limiting registrants to only one hyperlink as opposed to 
multiple hyperlinks may make compliance efforts somewhat more 
burdensome, we do not believe this restriction will significantly 
change existing disclosure practices as the Commission's current rules 
prohibit incorporation by reference when it would render the disclosure 
unclear or confusing.\289\ Moreover, registrants that select this 
option will benefit from the reduction in costs to disclose duplicative 
information. Finally, for those registrants who find this restriction 
too limiting, we believe that the costs of copying relevant disclosure 
from a previous filing, rather than incorporating it by reference, 
should be minimal.
---------------------------------------------------------------------------

    \289\ See Securities Act Rule 411(e) and Exchange Act 12b-23(e).
---------------------------------------------------------------------------

    The final amendments to Item 101(a) provide a non-exclusive list of 
topics that should be disclosed if material. Providing potential 
disclosure topics should help clarify the disclosure requirements and 
avoid potential confusion among registrants. Besides the topics 
currently included under Item 101(a), the disclosure topics in the 
final amendments also add material changes to a registrant's previously 
disclosed business strategy. Several studies have found that business 
strategy is a critical determinant of corporate success \290\ and an 
essential component of business model design,\291\ so investors may 
benefit from any increase in the disclosure of material changes to 
previously disclosed business strategies. A number of commenters also 
supported the inclusion of material changes to business strategy as a 
non-exclusive disclosure example.\292\
---------------------------------------------------------------------------

    \290\ See Jay B. Barney, Strategic Factor Markets: Expectations, 
Luck, and Business Strategy 32 Mgmt. Sci. 1231 (1986) (suggesting 
that strategies focusing on creating imperfectly competitive product 
markets may not generate superior performance if the cost of 
implementing such strategies is high, and that strategic choices 
should flow mainly from the analysis of its antecedent unique skills 
and capabilities, rather than from the analysis of its competitive 
environment). See also Thomas Ritter and Hans G. Gemunden, The 
Impact Of A Company's Business Strategy on Its Technological 
Competence, Network Competence and Innovation Success, 57(5) J. Bus. 
Res. 548 (2004) (finding that a company's innovation success is 
positively correlated with the strength of its technology-oriented 
business strategy).
    \291\ See David J. Teece, Business Models, Business Strategy and 
Innovation, 43 Long Range Planning 172 (2009) (examining the 
significance of business models and exploring their connections with 
business strategy, innovation management, and economic theory). See 
also Patrick Spieth et al., Exploring the Linkage between Business 
Model (&) Innovation and the Strategy of the Firm, 46 R&D Mgmt. 403 
(2016) (examining firm strategy-business model linkage and exploring 
the role of business model innovation as analytic perspective for 
identifying sources of firm performance).
    \292\ See supra note 47.
---------------------------------------------------------------------------

    Some commenters expressed concerns that this amendment could impose 
costs on filers if the disclosure of ``material changes'' in business 
strategy reveals sensitive or proprietary corporate information.\293\ 
One commenter suggested that a safe harbor provision should be added to 
avoid disclosure of sensitive information.\294\ However, because the 
final amendments do not make the disclosure of business strategy 
mandatory if a registrant has not previously disclosed its business 
strategy and a registrant will have considerable flexibility to tailor 
its business strategy disclosure, the costs of revealing proprietary 
information that could be harmful to registrants' competitive positions 
should be limited.
---------------------------------------------------------------------------

    \293\ See letters from UnitedHealth Group, Dunker, Society, DP&W 
and GM.
    \294\ See letter from FEI.
---------------------------------------------------------------------------

    Overall, investors and registrants may benefit from the final 
amendments to Item 101(a) if the existing requirements elicit 
disclosure that is not material to an investment decision and/or is 
more costly to provide. However, providing registrants with additional 
flexibility to determine (i) whether certain information is material, 
and (ii) how to disclose such information may result in the reduction 
or loss of information in cases in which registrants no longer disclose 
information material to an investment decision.
ii. Narrative Description of Business (Item 101(c))
    Item 101(c) requires a narrative description of the registrant's 
business. The current requirement identifies twelve specific items that 
must be disclosed to the extent material to an understanding of the 
registrant's business taken as a whole. We are revising the 
requirements in Item 101(c) to be more clearly principles based. The 
final amendments require a description of the business and set forth 
seven non-exclusive examples of information to disclose if material to 
an understanding of the business. These examples include some, but not 
all, of the current disclosure topics required under Item 101(c) as 
well as some additional topics. Emphasizing a principles-based approach 
to Item 101(c) will give rise to the potential economic effects 
discussed in Section I.B.1 above. In addition, eliminating more 
prescriptive disclosure topics (e.g., dollar amount of backlog orders 
believed to be firm) may diminish comparability across firms.
    The disclosure topics that are retained, with some changes, as 
examples under the final amendments are: (1) Principal products 
produced and services rendered, and dependence on certain customers; 
(2) new products and competitive conditions; (3) sources and 
availability of raw materials and intellectual property; (4) business 
subject to renegotiation or termination of government contracts; (5) 
seasonality of the business; and (6) the number of persons employed. As 
the information required under Item 101(c) can be relevant to firm 
value,\295\ investors and registrants will likely benefit if the 
examples elicit information material to an investment decision while 
allowing registrants to tailor the disclosure to their specific 
circumstances.
---------------------------------------------------------------------------

    \295\ For example, some academic research has found that the 
introduction of a new product increases long-term financial 
performance of the company and firm value. See Dominique Hanssens et 
al., New Products, Sales Promotions, and Firm Value: The Case of the 
Automobile Industry, 68 J. Marketing 142 (2004); see also Amil 
Petrin, Quantifying the Benefits of New Products: The Case of the 
Minivan, 110 J. Pol. Econ. 705 (2002). Similarly, some academic 
research has found that patents have a significant impact on firm-
level productivity and market value. See Nicholas Bloom and John Van 
Reenen, Patents, Real Options and Firm Performance, 112 Econ. J. C97 
(2002); Zvi Griliches, Market Value, R&D and Patents, 7 Econ. 
Letters 183 (1981).
---------------------------------------------------------------------------

    The final amendments will expand the existing disclosure topic 
regarding the number of persons employed to encompass a description of 
the registrant's human capital resources. This disclosure topic will 
require, in addition to the number of persons employed, a description 
of any human capital measures or objectives that the registrant focuses 
on in managing the business, to the extent such disclosures are 
material to an understanding of the registrant's business. The rule 
also will provide non-exclusive examples of human capital measures and 
objectives, such as measures or objectives that address the attraction, 
development, and retention of personnel.
    In one meta-analysis, which reviewed 66 studies, the authors found 
that besides the number of employees, other human capital 
characteristics, including education, experience, and training, have 
positive effects on firm performance.\296\ Another study found that 
turnover rates reflect human

[[Page 63751]]

resource management practices.\297\ These studies suggest that 
investors may benefit from additional information elicited by the human 
capital topic. Many commenters agreed that investors would benefit from 
such disclosure, but offered different suggestions for what that 
disclosure should include.\298\ Registrants will incur incremental 
compliance costs to provide this additional information.\299\ To the 
extent that some registrants already disclose such information, for 
them the incremental benefits and costs would likely be lower than if 
they were providing no such disclosure.\300\ We recognize, however, 
that even for some registrants who are currently disclosing such 
information, the incremental compliance costs may not be trivial.
---------------------------------------------------------------------------

    \296\ See T.R. Crook et al., Does human capital matter? A meta-
analysis of the relationship between human capital and firm 
performance, 96 J. Applied Psychol. 443 (2011).
    \297\ See Mark A. Huselid, The Impact of Human Resource 
Management Practices on Turnover, Productivity, and Corporate 
Financial Performance, 38 Acad. Mgmt. J. 635 (1995).
    \298\ See supra note 121.
    \299\ See letters from UnitedHealth Group, Nasdaq, FCLTGlobal, 
SHRM, GM, and FEI.
    \300\ See letters from ICEE, Hermes, CtW, ICGN, HCMC, CalPERS, 
NYSCRF, and NYC Comptroller.
---------------------------------------------------------------------------

    The final amendments also replace the requirement to disclose the 
material effects on the registrant of compliance with environmental 
laws with a disclosure topic that covers the material effects of 
compliance with material government regulations, including 
environmental laws. To the extent that information about compliance 
with government regulations affects firm value, investors may benefit 
from additional information about the effects of material government 
regulations. Registrants, however, will incur incremental compliance 
costs to provide this information. To the extent that many registrants 
already disclose such information, the incremental benefits and costs 
could be limited.
    Some of the disclosure requirements currently contained in Item 
101(c) are not included as potential topics in the revised rule.\301\ 
To the extent that the elimination of these topics results in a loss of 
material information, there may be costs to investors.\302\ However, we 
believe that any such costs would be limited given that, under the 
principles-based approach, the list of disclosure topics will not be 
exhaustive and registrants still will be required to provide disclosure 
about such matters if they are material to an understanding of the 
business.
---------------------------------------------------------------------------

    \301\ The final amendments will no longer list the following 
topics: Disclosure about new segments and dollar amount of backlog 
orders believed to be firm, in addition to working capital 
practices, which we discuss below.
    \302\ An academic study shows that acquisition of new segments 
has significant effects on firm productivity. The study finds that 
firms diversifying into a new segment experience a net reduction in 
productivity. Specifically, while productivity of new plants 
increases, incumbent plants suffer. See Antoinette Schoar, The 
Effect of Diversification on Firm Productivity, 62 J. Fin. 2379 
(2002). Another study shows that backlog orders can predict future 
earnings. See Siva Rajgopal et al., Does the Market Fully Appreciate 
the Implications of Leading Indicators for Future Earnings? Evidence 
from Order Backlog, 8 Rev. Acct. Stud. 461 (2003). Based on these 
studies, it is reasonable to expect that information on new segments 
and dollar amount of backlog orders believed to be firm could be 
material to investors in certain circumstances.
---------------------------------------------------------------------------

    Additionally, in an effort to consolidate working capital 
disclosure in one location and to avoid duplicative disclosure, the 
final amendments eliminate working capital practices as a disclosure 
topic in Item 101(c), given that this information, when material, often 
is elicited by MD&A disclosure requirements.\303\ If duplicative 
disclosure distracts investors from other important information, this 
amendment may benefit investors by reducing repetition and facilitating 
more efficient information processing. However, to the extent that 
information on working capital practices will no longer be available in 
the narrative description of business required by Item 101(c), 
investors may have to spend more time synthesizing this information 
from other locations. Registrants may marginally benefit from reduced 
compliance costs from the elimination of duplicative disclosure.
---------------------------------------------------------------------------

    \303\ See letters from FEI and Chevron.
---------------------------------------------------------------------------

    Overall, investors and registrants may benefit from the final 
amendments to Item 101(c) if the revised rules result in disclosure 
that is more likely to be material to an investment decision and avoid 
disclosure that is not material and/or is costly to provide.
iii. Legal Proceedings (Item 103)
    Item 103 requires disclosure of material pending legal proceedings 
and other relevant information about the proceedings, such as the name 
of the court, the date instituted, and the principal parties involved. 
Given that involvement in legal proceedings can affect a firm's cash 
flows through multiple channels, including legal fees, the cost of 
executives being distracted from their main operational tasks, 
reputational costs, and settlement costs, information required under 
Item 103 is relevant to firm value.\304\ Therefore, investors will 
benefit if the final amendments to Item 103 result in more effective 
disclosure of material legal proceedings information.
---------------------------------------------------------------------------

    \304\ Several studies also have found that the possibility of 
legal proceedings may affect corporate decisions, such as pricing of 
securities and management's information dissemination. See, e.g., 
Michelle Lowry and Susan Shu, Litigation Risk and IPO Underpricing, 
65 J. Fin. Econ. 309 (2002) (finding that firms with higher 
litigation risk underprice their IPOs by a greater amount as a form 
of insurance, and underpricing by a greater amount lowers expected 
litigation costs); and Douglas J. Skinner, Why Firms Voluntarily 
Disclose Bad News?, 32 J. Acct. Res. 38 (1994) (suggesting that 
because shareholders are more likely to sue over earnings 
announcements with large negative returns, firms have an incentive 
to disclose bad earnings early in order to reduce the probability of 
being sued and the magnitude of damages); see also Joel F. Houston 
et al., Litigation Risk and Voluntary Disclosure: Evidence from 
Legal Changes, 94 Acct. Rev. 247 (2019) (finding a positive relation 
between the expectation of litigation and voluntary disclosure and 
suggesting that earnings forecast strategies are often designed to 
deter litigation).
---------------------------------------------------------------------------

    Currently, Item 103 and U.S. GAAP, which requires disclosure of 
certain loss contingencies, overlap in the requirement to disclose 
certain information associated with legal proceedings. As a result, in 
order to comply with Item 103, registrants commonly repeat disclosures 
that are already provided elsewhere in registration statements and 
periodic reports. The final amendments to Item 103 encourage the use of 
hyperlinks or cross-references to avoid repetitive disclosure. If 
duplicative disclosure distracts investors from other important 
information, the final amendments may benefit investors by reducing 
repetition and facilitating more efficient information processing. 
However, to the extent that some information on legal proceedings will 
no longer be readily available under Item 103, investors may have to 
spend more time synthesizing this information from other locations. 
Nevertheless, we believe the increase in information processing cost 
for investors would be minimal. While registrants may incur minimal 
compliance costs if they choose to include hyperlinks, those costs 
generally would be less than the costs of disclosing duplicative 
information in a document.
    Currently, Item 103 specifically requires disclosure of any 
proceedings under environmental laws to which a governmental authority 
is a party unless the registrant reasonably believes that the 
proceeding will result in monetary sanctions, exclusive of interest and 
costs, of less than $100,000. This bright-line threshold for 
environmental proceedings was adopted in 1982. The final amendment 
includes a modified disclosure threshold that increases the existing 
$100,000 threshold to $300,000 (to account for inflation), but also 
affords a registrant some flexibility. Specifically, the amendment will 
allow a registrant to select a different threshold, with an upper bound 
of the lesser of $1 million or one percent of its

[[Page 63752]]

current assets, that it determines is reasonably designed to result in 
disclosure of material environmental proceedings. Research has found 
that environmental liabilities can influence certain corporate 
decisions related to managing environmental regulatory risk \305\ and 
that some investors include environmental criteria in their investment 
strategies.\306\ As discussed above, commenters' views were mixed on 
whether we should retain a bright-line disclosure threshold or move to 
a more principles-based approach.\307\ Also as discussed above, 
environmental proceedings often can be complex from a factual and legal 
standpoint so a bright-line, quantitative threshold can help 
registrants by eliminating the need to make an assessment of whether a 
particular proceeding that exceeds the threshold is subject to 
disclosure on a principles basis. However, a single quantitative 
threshold that is set at a level that is designed to limit the need to 
make materiality judgments is likely to result in some disclosures, 
particularly for larger registrants that are not material. 
Alternatively, a materiality-based threshold would lower compliance 
costs for registrants by reducing the disclosure of proceedings that 
are not material, but also may increase the costs to registrants to 
assess whether the disclosure of environmental proceedings is 
appropriate. Because it involves a certain degree of judgment, there 
also may be costs associated with misapplication of a materiality-based 
standard. For example, depending on the facts and circumstances 
(including the size of a registrant) misapplication of such a standard 
may result in disclosure of proceedings that are not material, 
particularly when considered in relation to the registrant's total 
assets or revenues, or the non-disclosure of proceedings that are 
material.\308\ The two-pronged approach that will be required under the 
final rule will benefit registrants and potentially lower their 
compliance costs since it includes a minimum quantitative threshold 
while also providing them with the flexibility to apply a more tailored 
disclosure threshold within a range that has an upper limit of $1 
million. Under such an approach, registrants will continue to provide 
information on a bright-line basis using a threshold that is designed 
to capture at least all information that would be material to an 
investment or voting decision but will have the flexibility to use a 
disclosure threshold that is more indicative of materiality on a 
company-specific basis. Additionally, the two-pronged approach will 
reduce the risk of non-disclosure of material information, particularly 
for larger issuers, because disclosure will be required in all cases 
for any proceeding when the potential monetary sanctions exceed the 
lesser of $1 million or one percent of the current assets of the 
registrant and its subsidiaries on a consolidated basis. We estimate 
that $1 million represents approximately 0.01% of the mean current 
assets (0.02% of the median current assets) of companies in the S&P 
500.\309\ Accordingly, we expect that many larger registrants will be 
subject to a maximum bright-line disclosure threshold of $1 million, 
representing substantially less than one percent of current assets. We 
believe this proportionately lower threshold, which is likely to result 
in the disclosure of information that is not material to an investment 
decision, is nevertheless appropriate, as assessing the materiality of 
governmental monetary sanctions, even in lower amounts, may be 
difficult and as a result, it may be more efficient for registrants and 
investors to bear the costs of some degree of over-disclosure.
---------------------------------------------------------------------------

    \305\ See Dean Neu et al., Managing Public Impressions: 
Environmental Disclosures in Annual Reports, 23 Acct. Org. & Soc'y 
265 (1998) (using a matched-pair sample of publicly traded Canadian 
companies that have been subject to environmental fines and those 
that have not to analyze changes in pre-fine and post-fine 
environmental disclosure quality, and finding that environmental 
disclosure provides organizations with a method of managing 
potential discrediting events); see also Xin Chang et al., Corporate 
Environmental Liabilities and Capital Structure (2018), available at 
https://ssrn.com/abstract=3200991 (documenting that firms with 
higher environmental liabilities maintain lower financial leverage 
ratios and suggesting that environmental liabilities and financial 
liabilities are substitutionary).
    \306\ See Steve Schueth, Socially Responsible Investing in the 
United States, 43 J. Bus. Ethics 189 (2003) (providing an overview 
of the concept and practice of socially and environmentally 
responsible investing, describing the investment strategies 
practiced in the U.S., offering explanations for its growth, and 
examining who chooses to invest in a socially and environmentally 
responsible manner). See also Laura Starks et al., Corporate ESG 
profiles and investor horizons (2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049943 (finding that 
investors behave more patiently toward environmentally-responsible 
firms as they sell less after negative earnings surprises or poor 
stock returns). However, investors may derive value from 
characteristics of investments that are unrelated to financial 
performance, and these studies do not directly address whether 
environmental disclosures provide material information to investors.
    \307\ See supra notes 176 and 178.
    \308\ See supra note 187.
    \309\ This analysis uses current asset data for fiscal year 2019 
from Standard & Poor's Compustat Daily Updates database.
---------------------------------------------------------------------------

    Since the two-pronged approach we are adopting includes 
quantitative thresholds that are higher than the current threshold, 
registrants of all sizes should benefit from reduced compliance costs. 
For example, Table 1 below summarizes the number of registrants that 
have cases in the EPA's Enforcement and Compliance History Online 
Database over the period 2009-2019 and provides summary statistics on 
the size of the monetary sanctions, in dollar terms and as a percentage 
of registrants' current assets. For each year, the table shows the 
estimated number of registrants that incurred environmental proceedings 
with monetary sanctions exceeding (i) $100,000, (ii) $300,000 and (iii) 
the lesser of $1 million or one percent of the current assets of the 
registrant and its subsidiaries on a consolidated basis.
    The increase in the disclosure threshold from $100,000 to $300,000 
would have resulted on average in an upper bound decrease of 30% in the 
number of registrants that have to report such sanctions during the 
period under consideration, with the median ratio of sanctions to 
current assets of approximately 0.12%. The use of an alternative 
threshold that requires disclosure when sanctions exceed the lesser of 
$1 million or one percent of the current assets of the registrant 
results in an additional average upper bound decrease of 30% in the 
number of registrants that have to report such sanctions during the 
period under consideration, with the median ratio of sanctions to 
current assets of approximately 0.30%.
    Based only on a financial assessment of the mean (and median) total 
sanctions as a percentage of current assets, we would not expect these 
changes to result in the non-disclosure of information that would be 
material to an investment or voting decision. The data in Table 1 also 
suggests that the $100,000 threshold likely resulted in the disclosure 
of a substantial amount of non-material information. In addition, it 
further suggests that the new two-pronged approach is likely to 
continue to result in the disclosure of a substantial amount of non-
material information, albeit less than is currently required.

[[Page 63753]]

                     Table 1--Statistics for SEC Registrant Cases in EPA's Enforcement and Compliance History Online Database (ECHO)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Registrants
                                                             Number of                                      paying the
                                           Number of SEC    registrants     Registrants     Registrants    lesser of $1                    Mean (median)
                  Year                      registrants      incurring    paying >$100 K  paying >$300 K   mil. or 1% of   Mean (median)   total cost as
                                               \310\         sanctions    in total costs  in total costs  current assets    total cost     % of current
                                                               \311\           \312\           \313\      in total costs                      assets
                                                                                                               \314\
--------------------------------------------------------------------------------------------------------------------------------------------------------
2009....................................           9,731              75              19              15              10     $16,379,707            1.2%
                                                                                                                               ($19,950)            (0%)
2010....................................           9,003              86              17              14              10      26,920,867            0.1%
                                                                                                                                (17,500)            (0%)
2011....................................           8,680              81              30              19              14      66,758,061            2.0%
                                                                                                                                (49,338)            (0%)
2012....................................           8,277              77              31              21              11         882,259            0.2%
                                                                                                                                (56,490)            (0%)
2013....................................           7,944              61              18              14              12      27,346,304           18.2%
                                                                                                                                (37,500)            (0%)
2014....................................           7,891              78              42              30              19      30,219,344            3.0%
                                                                                                                               (113,096)            (0%)
2015....................................           7,802              71              32              18              12      17,283,790            4.9%
                                                                                                                                (85,428)            (0%)
2016....................................           7,395              64              22              16              13      41,799,497            2.2%
                                                                                                                               (41,743))            (0%)
2017....................................           7,095              56              24              18              11         647,166            0.1%
                                                                                                                                (66,750)            (0%)
2018....................................           6,920              52              11               9               5       6,037,039            2.2%
                                                                                                                                (11,027)            (0%)
2019....................................           6,793              45              19              10               8       1,079,256            0.1%
                                                                                                                                (54,636)            (0%)
                                         ---------------------------------------------------------------------------------------------------------------
    Pooled sample estimates.............................................................................................      23,167,757            2.9%
                                                                                                                                (41,880)            (0%)
--------------------------------------------------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \310\ This column counts all unique CIKs with 10-Ks and 10-K/As 
made available on EDGAR for the calendar year. The subset of 
registrants that only report 10-Qs and 10-Q/As are excluded from 
this count. If CIKs are re-used by another registrant during the 
year, the CIK will only count once.
    \311\ A registrant is counted once even if it has multiple ECHO 
cases that settle within a given year. The settlement date 
determines the year for a given case. The amounts from multiple 
cases are added together for each registrant per year to determine 
the number of registrants that exceeded the 100K and 300K thresholds 
in Table 1. Because the start date of an enforcement case is not 
always populated in ECHO (e.g., approximately 25% of the cases that 
we matched to SEC registrants for the period 2009-2019 were missing 
a start date), we only count a case in the year when a sanction/
settlement agreement was imposed/negotiated. Thus, Table 1 may 
exclude registrants who had an ongoing case during the period 2009-
2019 that was not settled in that period. Also, enforcement cases 
that name the subsidiary of a registrant as a respondent or 
defendant instead of the registrant itself are often excluded from 
our counts since we do not have information on registrant 
subsidiaries. Similarly, since ECHO contains registrants' names and 
not their CIK, we match registrants with ECHO by name. Differences 
in names between SEC filings and ECHO may have resulted in fewer 
matches. ECHO is available at https://echo.epa.gov/facilities/enforcement-case-search/results.
    \312\ This number is based on the total cost for all penalties, 
Supplemental Environmental Projects, and compliance actions.
    \313\ Id.
    \314\ Data on current assets was retrieved from Compustat-
CapitalIQ.
---------------------------------------------------------------------------

iv. Risk Factors (Item 105)
    Item 105 requires disclosure of the most significant factors that 
make an investment in the registrant or offering speculative or risky. 
Some academic research supports the notion that information currently 
required under Item 105 is important to investors. For example, there 
is evidence that risk factor disclosure by publicly traded firms is 
material in content.\315\ There also is evidence suggesting that 
investors benefit from risk factor disclosures that are more 
specific.\316\ In measuring long-run returns to IPO stocks, some 
studies conclude that the returns are commensurate with the risk 
profiles of the individual firms.\317\ Together, this research supports 
the notion that effective disclosures of risk factors can help 
investors better manage their risk exposure.
---------------------------------------------------------------------------

    \315\ See Todd Kravet, and Volkan Muslu, Textual Risk 
Disclosures and Investors' Risk Perceptions, 18 Rev. Acct. Stud. 
1088 (2013) (finding that the increases in annual risk disclosures 
are associated with higher stock return volatility and trading 
volume around the filings). See also John L. Campbell et al., The 
information content of mandatory risk factor disclosures in 
corporate filings, 19 Rev. Acct. Stud. 396 (2014) (finding that the 
required disclosure of risk factors in Form 10-K filings affect 
market beta, stock return volatility, information asymmetry, and 
firm value, and that firms that face more risks disclose 
correspondingly more in the risk factor discussion); Allen Huang et 
al., An Unintended Benefit of the Risk Factor Mandate of 2005 
(2019), available at http://dx.doi.org/10.2139/ssrn.3219712 (finding 
that risk factor disclosure is associated with an improved 
information environment).
    \316\ See Ole Kristian Hope et al., The Benefits of Specific 
Risk-Factor Disclosures, 21 Rev. Acct. Stud. 1005 (2016) (finding 
that the market reaction to a Form 10-K filing is positively and 
significantly associated with specificity and suggesting that 
analysts are better able to assess fundamental risk when firms' 
risk-factor disclosures are more specific).
    \317\ See Bj[oslash]rn Eckbo and [Oslash]yvind Norli, Liquidity 
Risk, Leverage, and Long-Run IPO Returns, 11. J. Corp. Fin. 1 (2005) 
(constructing a portfolio of 6,000 IPO stocks and measuring their 
returns in order to compare them with individual risk factors). The 
model for risk estimation includes several quantitative measures, as 
well as simple characteristic-based risks of the type disclosed in 
Forms S-1 and 10-K. The results indicate that the returns are likely 
fully justified by the increased risk of the IPO firms.
---------------------------------------------------------------------------

    The amendments to Item 105 will require a bullet point summary of 
the principal risk factors that is no more than two pages in the 
forepart of the document when the risk factor section exceeds 15 pages. 
If lengthy risk factor disclosure contains information that is less 
meaningful to investors, such as generic risks that could apply to any 
investment in securities, a brief summary of the risk factors should 
benefit investors, especially those who have less time to review and 
analyze registrants' disclosure, by enabling them to make more 
efficient investment decisions. The potential benefit of a brief 
summary may be limited for some registrants if they cannot disclose all 
material risks in a two-page summary, although all material risk 
factors will still be required to appear in the risk factor section. 
The requirement to

[[Page 63754]]

prepare a risk factor summary may increase the compliance costs. For 
example, one commenter stated that the proposed amendments may require 
registrants to rank risk factors, which would increase the compliance 
burden.\318\ Other commenters expressed concern that the proposed 
amendments could create litigation risks.\319\ Yet another commenter 
asserted that a risk factor summary could be especially burdensome for 
smaller and pre-IPO firms that deem a wide range of information at 
their stage of life cycle to be material, and thus may deter them from 
going public.\320\
---------------------------------------------------------------------------

    \318\ See letter from Nareit.
    \319\ See letters from FEI and Nareit.
    \320\ See letter from Society.
---------------------------------------------------------------------------

    While we are cognizant of potential compliance costs associated 
with the preparation of a risk factor summary, such an increase should 
be limited due to the requirement that the summary cannot exceed two 
pages. The use of a risk factor summary, when the full risk factor 
discussion exceeds 15 pages, should make the disclosure more user 
friendly and improve its readability.\321\ The new threshold also could 
incentivize registrants to limit the length of their risk factor 
disclosure to no more than 15 pages. Based on current disclosure 
practices, we estimate that a 15-page threshold will affect 
approximately 40 percent of registrants.\322\ If registrants shorten 
their risk factor disclosure to avoid triggering the summary disclosure 
requirement, the disclosure might become less detailed. However, 
registrants that are providing lengthy risk factor disclosure to reduce 
potential litigation risks might be less likely to shorten the 
disclosure simply to avoid providing the summary.\323\ We do not 
believe that the compliance costs associated with the risk factor 
summary of up to two pages will be so large as to affect a company's 
decision whether to go public.\324\
---------------------------------------------------------------------------

    \321\ See supra note 205 and accompanying text.
    \322\ To estimate the percentage of registrants that would be 
affected by a 15-page threshold, we extracted all Forms S-1, S-3, S-
4, S-11, 1-A, 10, and 10-K filed with the Commission during calendar 
year 2018. This population consists of approximately 10,000 forms. 
We then excluded Forms 10-K filed by smaller reporting companies and 
asset-backed issuers as well as Forms 10 filed by smaller reporting 
companies because these registrants are not required to provide risk 
factor disclosure per Item 1A or Instruction J. Next, we constructed 
a random sample of 100 companies and calculated the length of their 
risk factor disclosure. The resulting page distribution had the mean 
of 15.26 and median of 13.5 pages. The 15-page threshold is around 
the 60th percentile of the distribution. Therefore, we estimate that 
this threshold will affect approximately 40 percent of registrants.
    \323\ See letters from FEI, Nareit, and Society.
    \324\ See supra note 220 and accompanying text (discussing 
commenters' concerns about litigation risk).
---------------------------------------------------------------------------

    The final amendments to Item 105 also replace the requirement to 
discuss the ``most significant'' risks with ``material'' risks. The 
economic effects of the final amendment depend on the preferences of 
investors. If the existing ``most significant'' standard elicits too 
much or too little information, investors may benefit from the 
materiality standard emphasized in the final rules. Focusing on the 
risks to which investors would attach the most importance should enable 
them to make more efficient investment decisions. Registrants may 
experience increased (decreased) compliance costs if the materiality 
standard results in more (less) expansive disclosure than the existing 
``most significant'' standard.
    In addition, the final amendments revise Item 105 to require 
registrants to organize their risk factor disclosure under relevant 
headings, with generic risk factors, if disclosed, appearing at the end 
of the risk factor section under the caption ``General Risk Factors.'' 
Some academic research has found that different types of registrants 
disclose different types of risk factors and certain types of risk 
factors are more correlated with stock return volatilities and 
systematic risks.\325\ Therefore, well-organized risk factor disclosure 
that gives greater prominence to material risks could benefit 
investors, especially those who have less time to review and analyze 
registrants' disclosure, by enabling them to make more efficient 
investment decisions. Registrants may incur additional costs to 
organize their risk factor disclosure. To the extent that some 
registrants already organize their risk factor disclosure through 
groupings of related risk factors and the use of headings, the 
compliance costs will be limited.\326\
---------------------------------------------------------------------------

    \325\ See Ryan D. Israelsen, Tell It Like It Is: Disclosed Risks 
and Factor Portfolios (2014), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2504522 (using textual analysis 
techniques to extract a broad set of disclosed risk factors from 
firms' SEC filings to examine characteristics of the firms most 
likely to make each type of disclosure, and investigating the 
relation between firms' risk disclosures and their stock return 
volatilities and factor loadings).
    \326\ See letters from Nasdaq and Society.
---------------------------------------------------------------------------

C. Anticipated Effects on Efficiency, Competition, and Capital 
Formation

    As discussed above, the final amendments may improve capital 
allocation efficiency by enabling investors to make more efficient 
investment decisions. For example, the final amendments may reduce 
search costs for certain investors by eliminating information that is 
not material to those investors. Given that certain investors may have 
less time to review and analyze registrants' disclosure,\327\ 
elimination of such information may facilitate more efficient 
investment decision making. In addition, permitting registrants to omit 
disclosure of information when it is not material may reduce registrant 
compliance costs, allowing registrants to deploy resources towards more 
productive uses and thus encouraging capital formation. The reduction 
in compliance costs might be particularly beneficial for smaller and 
younger registrants that are resource-constrained.\328\
---------------------------------------------------------------------------

    \327\ See David Hirshleifer and Siew Hong Teoh, Limited 
attention, information disclosure, and financial reporting, 36 J. 
Acct. & Econ. 337 (2003) (developing a theoretical model where 
investors have limited attention and processing power and showing 
that, with partially attentive investors, the means of presenting 
information may have an impact on stock price reactions, mis-
valuation, long-run abnormal returns, and corporate decisions).
    \328\ We note, however, that, except for the elimination of the 
provision that requires smaller reporting companies to describe the 
development of their business during the last three years, smaller 
reporting companies that elect to provide the alternative business 
disclosure under Item 101(h) will continue to have mostly 
prescriptive requirements under the final amendments.
---------------------------------------------------------------------------

    However, in cases in which registrants misjudge what information is 
material, a principles-based disclosure framework relying on 
registrants' determinations of the importance of information to 
investors could result in increased information asymmetries between 
registrants and investors. Such asymmetries may increase the cost of 
capital, reduce capital formation, and hamper efficient allocation of 
capital across companies. Overall, to the extent that the final 
amendments will eliminate disclosure that is not considered to be 
material, we believe these effects will be limited. Moreover, we expect 
this risk to be offset by mitigants, including corporate internal 
controls and the antifraud provisions of the securities laws.

D. Alternatives

    We are amending Items 101(a), 101(c), and 105 to be more clearly 
principles-based. As an alternative, we considered modifying these 
requirements using prescriptive standards. Several commenters expressed 
support for more prescriptive standards.\329\ For example, some 
commenters advocated for additional specific disclosures about 
environmental and foreign regulatory

[[Page 63755]]

risks, the types and composition of employees, and business 
strategy.\330\ A prescriptive standard could elicit additional specific 
disclosures, may be easier for registrants to apply, and could enhance 
the comparability and verifiability of information. However, not all of 
these disclosures will be relevant at the same level of detail for all 
registrants. Given that the optimal levels of disclosure for business 
description and risk factors, in particular, are likely to vary greatly 
across registrants, a more flexible principles-based approach is more 
likely to elicit the appropriate disclosures for these items. In 
addition, a prescriptive approach to a particular area of disclosure 
where the specified metric does not capture or does not fully capture 
the information likely to be material to an investment decision about a 
particular registrant or comparable registrants may lead investors to 
disproportionately rely on that metric for the registrant or as a 
comparative tool with respect to other registrants.
---------------------------------------------------------------------------

    \329\ See letters from ICGN, Public Citizen, Letter Type A, and 
AFL-CIO.
    \330\ See, e.g., letter from PRI.
---------------------------------------------------------------------------

    The final amendments to Item 101(a) will include a non-exclusive 
list of the types of information that a registrant may need to 
disclose. We could have included a new disclosure topic that would 
require, if material to an understanding of the general development of 
the business, disclosure of transactions and events that affect or may 
affect the company's operations. Given that existing MD&A disclosure 
requirements likely elicit similar information, including this 
disclosure topic could result in duplicative disclosures that would 
increase compliance costs for registrants without significantly 
improving the overall mix of information available to investors.
    The final amendments to Item 101(c) will require disclosure of 
human capital measures or objectives, including disclosure of the 
number of persons employed, to the extent material to an understanding 
of the registrant's business. One alternative to this disclosure topic 
would be to remove any reference to disclosure of the number of persons 
employed. This alternative would be consistent with the general 
principles-based approach of the final amendments that eschews 
specificity in favor of encouraging registrants to consider the 
particular types of information that would be material to an 
understanding of their business.\331\ However, such an alternative 
could have deprived investors of disclosure that provides them with 
valuable information that can be used in assessing productivity growth, 
compensation measures, and capital allocation.\332\ Moreover, 
disclosure of this metric would allow investors to readily compare 
different registrants and assess their cost of capital and future 
corporate performance.\333\ Therefore, retaining a specific reference 
to the number of employees in this disclosure topic may help 
registrants provide information that is material to an understanding of 
their business.
---------------------------------------------------------------------------

    \331\ In addition, some commenters consider that a focus on the 
employee number is outdated, arbitrary, and of limited use. See 
supra note 152.
    \332\ See supra note 150.
    \333\ See Frederico Belo et al., Labour Hiring, Investment, and 
Stock Return Predictability in the Cross Section, 122 J. Polit. 
Econ. 129 (2014) (finding that annual growth in employee count is 
associated with low cost of capital). See also Qin Li et al., 
Employee Turnover and Firm Performance: Large-Sample Archival 
Evidence (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3505626 (documenting that employee turnover 
is negatively associated with future financial performance).
---------------------------------------------------------------------------

    The final amendments also adjust for inflation the bright-line 
threshold for environmental proceedings in Item 103 from $100,000 to 
$300,000 and allow registrants to elect to use a different threshold, 
with an upper bound of the lesser of $1,000,000 or one percent of its 
current assets. As an alternative to this amendment, we considered 
applying only a materiality standard. On the one hand, a materiality 
standard might elicit disclosure that is more relevant to a 
registrant's operations. For example, the same dollar amount of 
environmental fines might have a significant impact on the cash flows 
of a small registrant but a marginal impact on the cash flows of a 
large registrant. On the other hand, some environmental proceedings can 
be factually and legally complex, so a bright-line threshold may 
provide an easy-to-apply benchmark for registrants that use it when 
determining whether a particular environmental proceeding should be 
disclosed.\334\ Furthermore, the imposition of fines and sanctions may 
be important information for investors in assessing a registrant's 
overall compliance efforts, even if, depending on the size of a 
registrant, such fines or sanctions may be construed as not material 
when considered in relation to the registrant's total assets or 
revenues. Another alternative would be to adopt a lower or higher 
bright-line threshold than the one proposed. The optimal threshold 
depends on the preference of investors. For example, a lower bright-
line threshold might be more appropriate if investors use information 
about environmental proceedings smaller than $300,000 to inform 
investment decisions.
---------------------------------------------------------------------------

    \334\ See supra note 177 and accompanying text.
---------------------------------------------------------------------------

    As another alternative, we considered making similar amendments to 
the corresponding disclosure requirements applicable to foreign private 
issuers \335\ and smaller reporting companies.\336\ For example, we 
considered making the business disclosure requirements under Form 20-F, 
which are largely prescriptive, more principles-based, similar to those 
we are adopting for domestic registrants. Although current rules 
provide certain accommodations specific to these types of registrants 
(e.g., scaled disclosures), they are generally more prescriptive. 
Amending these requirements to make them more principles-based would 
enable such registrants to realize the same expected benefits as other 
registrants by permitting them to tailor their disclosure to fit their 
own particular circumstances and reduce the amount of disclosure that 
is not material. However, such an alternative also could impose unique 
costs for these registrants. For example, such an approach could reduce 
the ability of foreign private registrants to use a single disclosure 
document that would be accepted in multiple jurisdictions. Similarly, a 
principles-based approach that requires more judgment may make it more 
difficult for smaller registrants with limited resources and less 
established reporting histories to meet their disclosure obligations 
and could increase the risk of persistent information asymmetries. For 
these reasons, and because we received limited feedback on these 
points, we are not adopting either of these alternatives.
---------------------------------------------------------------------------

    \335\ Business disclosure for foreign private issuers is 
governed by Part I of Form 20-F, and not by Item 101 of Regulation 
S-K. See supra note 23. The Commission amended Form 20-F in 1999 to 
conform it in large part to the non-financial disclosure standards 
endorsed by IOSCO. See supra note 12 and accompanying text.
    \336\ See supra note 19.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules, schedules, and forms that would be 
affected by the rule amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\337\ The Commission published a notice requesting comment on 
revisions to these collections of information requirements in the 
Proposing Release and has submitted these requirements to the Office of 
Management and Budget (``OMB'') for

[[Page 63756]]

review in accordance with the PRA.\338\ The hours and costs associated 
with preparing, filing, and sending the schedules and forms constitute 
reporting and cost burdens imposed by each collection of information. 
An agency may not conduct or sponsor, and a person is not required to 
comply with, a collection of information unless it displays a currently 
valid OMB control number. Compliance with the information collections 
is mandatory. Responses to the information collections are not kept 
confidential and there is no mandatory retention period for the 
information disclosed. The titles for the collections of information 
are: \339\
---------------------------------------------------------------------------

    \337\ 44 U.S.C. 3501 et seq.
    \338\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \339\ The paperwork burden for Regulation S-K is imposed through 
the forms that are subject to the requirements in this regulation 
and is reflected in the analysis of those forms.
---------------------------------------------------------------------------

     ``Form S-1'' (OMB Control No. 3235-0065);
     ``Form S-3'' (OMB Control No. 3235-0073;
     ``Form S-4'' (OMB Control No. 3235-0324);
     ``Form S-11'' (OMB Control No. 3235-0067);
     ``Form F-1'' (OMB Control No. 3235-0258);
     ``Form F-3'' (OMB Control No. 3235-0256);
     ``Form F-4'' (OMB Control No. 3235-0325);
     ``Form SF-1'' (OMB Control No. 3235-0707);
     ``Form SF-3'' (OMB Control No. 3235-0690);
     ``Form 10'' (OMB Control No. 3235-0064);
     ``Form 10-K'' (OMB Control No. 3235-0063);
     ``Form 10-Q'' (OMB Control No. 3235-0070);
     ``Schedule 14A'' (OMB Control No. 3235-0059); and
     ``Schedule 14C'' (OMB Control No. 3235-0057).
    The regulations, schedules, and forms listed above were adopted 
under the Securities Act and/or the Exchange Act. These regulations, 
schedules, and forms set forth the disclosure requirements for 
registration statements, periodic and current reports, distribution 
reports, and proxy and information statements filed by registrants to 
help investors make informed investment and voting decisions.
    A description of the amendments, including the need for the 
information and its use, as well as a description of the likely 
respondents, can be found in Section II above, and a discussion of the 
economic effects of the proposed amendments can be found in Section IV 
above.

B. Summary of Comment Letters

    In the Proposing Release, the Commission requested comment on the 
PRA burden hour and cost estimates and the analysis used to derive such 
estimates. We did not receive any comments that directly addressed the 
PRA analysis of the proposed amendments. Several commenters, however, 
did provide responses to certain requests for comment that have 
informed some of our PRA estimates. In this regard, several commenters 
stated that the proposals would eliminate or reduce disclosure of 
redundant and unnecessary information and give registrants the 
flexibility to focus on information that is material.\340\ These 
effects should also reduce the compliance burdens.
---------------------------------------------------------------------------

    \340\ See, e.g., letters from Society, Nasdaq, Dunker, DP&W and 
FEI.
---------------------------------------------------------------------------

C. Summary of the Impact on Collections of Information

    As discussed in more detail in the Proposing Release,\341\ we 
derived the burden hour estimates by estimating change in paperwork 
burden as a result of the amendments. As discussed in Section II, we 
have made some changes to the proposed amendments as a result of 
comments received. While certain of these changes could further reduce 
burdens on registrants, such as not adopting as a disclosure topic 
under Item 101(a)(1) transactions and events that affect or may affect 
the company's operations, or providing a modified disclosure threshold 
for environmental proceedings, others may incrementally increase those 
burdens relative to the proposals.
---------------------------------------------------------------------------

    \341\ See Section VIII of the Proposing Release.
---------------------------------------------------------------------------

    Considered together, we do not expect these changes to impact our 
assessment of the compliance burdens of the final rule amendments for 
purposes of the PRA. Accordingly, we have not revised the estimates of 
the impact on the per hour burden for the affected forms discussed in 
the Proposing Release. We have, however, added Schedule 14C as an 
affected form, which increases the totals in PRA Tables 3 and 4.
    PRA Table 1 summarizes the estimated impact of the final amendments 
on the paperwork burdens associated with the affected forms listed 
above.

[[Page 63757]]

                     PRA Table 1--Estimated Paperwork Burden Effects of the Final Amendments
----------------------------------------------------------------------------------------------------------------
             Final amendments and effects                     Affected forms            Estimated net effect *
----------------------------------------------------------------------------------------------------------------
Item 101(a) and Item 101(h):
     More principles-based disclosure           Forms S-1, S-4, 10,   2 hour net
     requirement, elimination of timeframe, and, for    10-K.                         decrease in compliance
     registration statements subsequent to the          Schedules 14A, 14C.   burden per form.
     initial registration statement, permitting                                       0.2 hour net
     registrants to provide an update and incorporate                                 decrease in compliance
     by reference to the most recently filed full                                     burden per schedule.
     disclosure that, together with the update, would
     present a complete discussion of the general
     development of a registrant's business, would
     decrease the paperwork burden by reducing
     repetitive and immaterial information about a
     registrant's business development. Estimated
     burden decrease: 3 hours per form; and, for
     Schedules 14A and 14C, 0.3 hour per schedule.**
     Addition of material changes to business
     strategy as a disclosure topic expected to
     increase the paperwork burden for some
     registrants, although such increase should be
     minimal, as many registrants already provide
     this disclosure. Estimated burden increase: 1
     hour per form; and, for Schedules 14A and 14C,
     0.1 hour per schedule.**
Item 101(c):
     More principles-based disclosure           Forms S-1, S-4, 10,   3 hour net
     requirement is expected to decrease the            10-K.                         increase in compliance
     paperwork burden. Estimated burden decrease: 3     Schedules 14A, 14C.   burden per form.
     hours per form; and, for Schedules 14A and 14C,                                  0.3 hour net
     0.3 hour per schedule.**                                                         increase in compliance
                                                                                      burden per schedule.
     Addition of human capital resources/
     measures and objectives as a disclosure topic
     expected to increase the paperwork burden.
     Estimated burden increase: 5 hours per form;
     and, for Schedules 14A and 14C, 0.5 hour per
     schedule.**
     Addition of material government (and not
     just environmental) regulations as a disclosure
     topic expected to increase the paperwork burden
     for some registrants, although such increase is
     expected to be minimal as many registrants
     already provide such disclosure. Estimated
     burden increase: 1 hour per form; and, for
     Schedules 14A and 14C, 0.1 hour per schedule.**
Item 103:
     Expressly provide for the use of cross-   Forms S-1, S-4, S-11, 10, 10- 3 hour net decrease in
     references or hyperlinks is expected to decrease   K, 10-Q, Schedules 14A, 14C.  compliance burden per form/
     the paperwork burden by discouraging repetitive                                  schedule
     disclosure. Estimated burden decrease: 1 hour
     per form/schedule.
     Raising the disclosure threshold for
     governmental environmental proceedings also is
     estimated to decrease the paperwork burden by
     reducing disclosure of immaterial proceedings.
     Estimated burden decrease: 2 hours per form/
     schedule.
Item 105:
     Summary risk factor disclosure provision   Forms S-1, S-3, S-    3 hour net
     could increase the paperwork burden for some       4, F-1, F-3, F-4, SF-1, SF-   decrease in compliance
     registrants, although such increase is expected    3.                            burden per form.
     to be minimal as the summary would consist of a    Form S-11..........   no change in
     bulleted list of no more than two pages.           Forms 10, 10-K.....   compliance burden.
     Estimated burden increase: 1 hour per form,                                      2 hour net
     except no increase for Form S-11,*** and 0.67                                    decrease in compliance
     hour increase per form for Forms 10 and 10-                                      burden per form.
     K.
     Summary risk factor disclosure provision
     could decrease the paperwork burden for other
     registrants to extent that it incentivizes
     registrants to provide streamlined risk factor
     disclosure focusing on the most salient risks.
     Estimated burden decrease: 4 hours per form,
     except no decrease for Form S-11,*** and 2.67
     hour decrease per form for Forms 10 and 10-K,
     .
     ``General Risk Factors'' heading
     provision could marginally increase the
     paperwork burden. Estimated burden increase: 0.5
     hour per form, except 0.33 hour increase per
     form for Forms 10 and 10-K].
     Substitution of ``material'' risks for
     ``most significant'' risks could marginally
     decrease the paperwork burden. Estimated burden
     decrease: 0.5 hours per form, except 0.33 hour
     decrease per form for Forms 10 and 10-K.
        Total........................................   Forms S-1, S-4.....   5 hour net
                                                        Forms S-3, S-11, F-   decrease per form.
                                                        1, F-3, F-4, SF-1, SF-3,      3 hour net
                                                        and 10-Q.                     decrease per form.
                                                        Form 10, 10-K......   4 hour net
                                                        Schedules 14A and     decrease per form.
                                                        14C.                          2.9 hour net
                                                                                      decrease per schedule.
----------------------------------------------------------------------------------------------------------------
* Estimated effect expressed as increase or decrease of burden hours on average and derived from staff review of
  samples of relevant sections of the affected forms.
** The lower estimated average incremental burden for Schedules 14A and 14C reflects the Commission staff
  estimate that annually no more than 10% of these filings include Item 101 disclosures.
*** Because Form S-11 already has a summary risk factor disclosure requirement, the amendments to Item 105 are
  not expected to affect the compliance burden for Form S-11 registrants.
 The lower estimated average incremental burden for Forms 10 and 10-K reflects the approximate
  number of these forms filed by smaller reporting companies which are not required to provide Item 105 risk
  factor disclosure.

[[Page 63758]]

D. Burden and Cost Estimates of the Amendments

    Below we estimate the incremental change in paperwork burdens as a 
result of the final amendments. These estimates represent the average 
burden for all registrants, both large and small. In deriving our 
estimates, we recognize that the burdens will likely vary among 
individual registrants based on a number of factors, including the size 
and nature of their business. We do not believe that the amendments 
will change the number of responses to the existing collections of 
information; rather, we estimate that the amendments will reduce the 
burdens per response.
    The burden reduction estimates were calculated by multiplying the 
number of responses by the estimated average reduction in the amount of 
time it would take a registrant to prepare and review the disclosures 
required under the amendments. For purposes of the PRA, the burden is 
to be allocated between internal burden hours and outside professional 
costs. The table below sets forth the percentage estimates we typically 
use for the burden allocation for each form. We also estimate that the 
average cost of retaining outside professionals is $400 per hour.\342\
---------------------------------------------------------------------------

    \342\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This estimate is 
based on consultations with several registrants, law firms, and 
other persons who regularly assist registrants in preparing and 
filing documents with the Commission.

  PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
                              and Schedules
------------------------------------------------------------------------
                                                            Outside
        Form/schedule type               Internal        professionals
                                        (percent)          (percent)
------------------------------------------------------------------------
Forms 10-K and 10-Q, Schedules 14A                 75                 25
 and 14C..........................
Forms S-1, S-3, S-4, S-11, F-1, F-                 25                 75
 3, F-4, SF-1, SF-3, and 10.......
------------------------------------------------------------------------

    The table below illustrates the incremental change to the total 
annual compliance burden of affected forms, in hours and in costs, as a 
result of the final amendments.

             PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Estimated                                              Estimated
                                                 Number of      burden hour   Total incremental      Estimated         reduction in     Total reduction
                    Form                         estimated      reduction/       reduction in       reduction in         outside           in outside
                                                 affected        affected        burden hours     internal burden      professional       professional
                                                 responses       response                              hours              hours              costs
                                                   (A) \343\             (B)    (C) = (A) x (B)              (D) =              (E) =   (F) = (E) x $400
                                                                                          \344\  (C) x (allocation  (C) x (allocation
                                                                                                                %)                 %)
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.........................................             901               5              4,505              1,126              3,379         $1,351,600
S-3.........................................           1,657               3              4,971              1,243              3,729          1,491,600
S-4.........................................             551               5              2,755                689              2,066            826,400
S-11........................................              64               3                192                 48                144             57,600
F-1.........................................              63               3                189                 47                142             56,800
F-3.........................................             112               3                336                 84                252            100,800
F-4.........................................              39               3                117                 29                 88             35,200
SF-1........................................               6               3                 18                  5                 14              5,600
SF-3........................................              71               3                213                 53                160             64,000
10..........................................             216               4                864                216                648            259,200
10-K........................................           8,137               4             32,548             24,411              8,137          3,254,800
10-Q........................................          22,907               3             68,721             51,541             17,180          6,872,000
Sch. 14A....................................           5,586             2.9             16,199             12,149              4,050          1,620,000
Sch. 14C....................................             569             2.9              1,650              1,238                412            164,800
                                             -----------------------------------------------------------------------------------------------------------
    Total...................................  ..............  ..............  .................             92,879             81,739         16,160,400
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The following table summarizes the requested paperwork burden, 
including the estimated total reporting burdens and costs, under the 
final amendments.
---------------------------------------------------------------------------

    \343\ The number of estimated affected responses is based on the 
number of responses in the Commission's current OMB PRA filing 
inventory. The OMB PRA filing inventory represents a three-year 
average.
    \344\ The numbers in Columns (C), (D) and (E) have been rounded 
to the nearest whole number.

                                                               PRA Table 4--Requested Paperwork Burden Under the Final Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Current burden                                 Program change                           Requested change in burden
                                             ---------------------------------------------------------------------------------------------------------------------------------------------------
                    Form                        Current      Current                                 Number of    Reduction   Reduction in
                                                 annual       burden        Current cost burden       affected    in company  professional     Annual     Burden hours         Cost burden
                                               responses      hours                                  responses      hours         costs      responses
                                                      (A)          (B)                         (C)          (D)          (E)           (F)    (G) = (A)           (H) =          (I) = (C) + (F)
                                                                                                                                                              (B) + (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.........................................          901      147,208                $180,319,975          901        1,126    $1,351,600          901         146,082             $178,968,375
S-3.........................................        1,657      193,626                 236,198,036        1,657        1,243     1,491,600        1,657         192,383              234,706,436
S-4.........................................          551      562,465                 677,378,579          551          689       826,400          551         561,776              676,552,179

[[Page 63759]]

 
S-11........................................           64       12,214                  14,925,768           64           48        57,600           64          12,166               14,868,168
F-1.........................................           63       26,692                  32,275,375           63           47        56,800           63          26,645               32,218,575
F-3.........................................          112        4,441                   5,703,600          112           84       100,800          112           4,357                5,602,800
F-4.........................................           39       14,049                  17,073,825           39           29        35,200           39          14,020               17,038,625
SF-1........................................            6        2,076                   2,491,200            6            5         5,600            6           2,071                2,485,600
SF-3........................................           71       24,552                  29,463,322           71           53        64,000           71          24,499               29,399,322
10..........................................          216       11,855                  14,091,488          216          216       259,200          216          11,639               13,832,288
10-K........................................        8,137   14,198,780               1,895,224,719        8,137       24,411     3,254,800        8,137      14,174,369            1,891,969,919
10-Q........................................       22,907    3,253,411                 432,290,354       22,907       51,541     6,872,000       22,907       3,201,870              425,418,354
Sch. 14A....................................        5,586      551,101                  73,480,012        5,586       12,149     1,620,000        5,586         538,952               71,860,012
Sch. 14C....................................          569       56,356                   7,514,944          569        1,238       164,800          569          55,118                7,350,144
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \345\ requires an agency 
in promulgating rules, to consider the impact of those rules on small 
entities. The Commission certified in the Proposing Release, pursuant 
to Section 605(b) of the RFA,\346\ that the proposed amendments to 
Items 101, 103, and 105 of Regulation S-K and related conforming 
amendments would not, if adopted, have a significant economic impact on 
a substantial number of small entities. The Commission solicited 
comments on its certification and received no comments.
---------------------------------------------------------------------------

    \345\ 5 U.S.C. 601 et seq.
    \346\ 5 U.S.C. 605(b). Section 605 of the RFA allows an agency 
to certify a rule is not expected to have a significant economic 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    The final amendments to Items 101, 103, and 105 will affect all 
small entities that file documents that must include disclosure 
required by these Items. However, we believe that the impact on small 
entities will not be significant. The primary effects of the final 
amendments will be to: (1) Increase a registrant's flexibility to 
provide disclosure regarding its business, including its general 
business development, so that it can tailor its disclosure to its 
particular circumstances; (2) eliminate or reduce disclosure about 
matters that are not material to an understanding of the business or to 
a registrant's legal proceedings; and (3) encourage risk factor 
disclosure that is shorter and concerns only material risks. We expect 
the final amendments will reduce the paperwork burden for all 
registrants, including small entities.\347\ Although, we anticipate 
that the economic impact of the reduction in the paperwork burden will 
be modest, the reduction in the burden will be beneficial to all 
registrants, including small entities. Accordingly, the Commission 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the final 
amendments to Items 101, 103, and 105 of Regulation S-K will not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA.
---------------------------------------------------------------------------

    \347\ See Section V.D.
---------------------------------------------------------------------------

VII. Statutory Authority

    The amendments contained in this release are being adopted under 
the authority set forth in Sections 7, 10, and 19(a) of the Securities 
Act, as amended, and Sections 3, 12, 13, 15, and 23(a) of the Exchange 
Act, as amended.

List of Subjects in 17 CFR Parts 229, 239, and 240

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

    In accordance with the foregoing, the Commission amends title 17, 
chapter II of the Code of Federal Regulations as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
1. The authority citation for part 229 continues to read as follows:

    Authority:  15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 
80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350; 
Sec. 953(b) Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 102(c), 
Pub. L. 112-106, 126 Stat. 310 (2012).

0
2. Amend Sec.  229.101 by:
0
a. Revising paragraphs (a) introductory text and (a)(1);
0
b. Redesignating paragraph (a)(2) as paragraph (a)(3);
0
c. Adding new paragraph (a)(2); and
0
d. Revising paragraph (c) and paragraph (h) introductory text.
    The revisions and addition read as follows:

Sec.  229.101  (Item 101) Description of business.

    (a) General development of business. Describe the general 
development of the business of the registrant, its subsidiaries, and 
any predecessor(s).
    (1) In describing developments, only information material to an 
understanding of the general development of the business is required. 
Disclosure may include, but should not be limited to, the following 
topics:
    (i) Any material changes to a previously disclosed business 
strategy;
    (ii) The nature and effects of any material bankruptcy, 
receivership, or any similar proceeding with respect to the registrant 
or any of its significant subsidiaries;
    (iii) The nature and effects of any material reclassification, 
merger or consolidation of the registrant or any of its significant 
subsidiaries; and
    (iv) The acquisition or disposition of any material amount of 
assets otherwise than in the ordinary course of business.
    (2) Notwithstanding the provisions of Sec.  230.411(b) or Sec.  
240.12b-23(a) of this chapter, as applicable, a registrant may only 
forgo providing a full discussion of the general development of its 
business for a filing other than an initial registration statement if 
it provides an update to the general development of its business, 
disclosing all of the material developments that have occurred since 
the most recent registration statement or report that includes a full 
discussion of the general development of its business. In addition, the 
registrant must incorporate by reference, and include one active 
hyperlink to one registration statement or report that includes, the 
full discussion of the general

[[Page 63760]]

development of the registrant's business.
* * * * *
    (c) Description of business. (1) Describe the business done and 
intended to be done by the registrant and its subsidiaries, focusing 
upon the registrant's dominant segment or each reportable segment about 
which financial information is presented in the financial statements. 
When describing each segment, only information material to an 
understanding of the business taken as a whole is required. Disclosure 
may include, but should not be limited to, the information specified in 
paragraphs (c)(1)(i) through (v) of this section.
    (i) Revenue-generating activities, products and/or services, and 
any dependence on revenue-generating activities, key products, 
services, product families or customers, including governmental 
customers;
    (ii) Status of development efforts for new or enhanced products, 
trends in market demand and competitive conditions;
    (iii) Resources material to a registrant's business, such as:
    (A) Sources and availability of raw materials; and
    (B) The duration and effect of all patents, trademarks, licenses, 
franchises, and concessions held;
    (iv) A description of any material portion of the business that may 
be subject to renegotiation of profits or termination of contracts or 
subcontracts at the election of the Government; and
    (v) The extent to which the business is or may be seasonal.
    (2) Discuss the information specified in paragraphs (c)(2)(i) and 
(ii) of this section with respect to, and to the extent material to an 
understanding of, the registrant's business taken as a whole, except 
that, if the information is material to a particular segment, you 
should additionally identify that segment.
    (i) The material effects that compliance with government 
regulations, including environmental regulations, may have upon the 
capital expenditures, earnings and competitive position of the 
registrant and its subsidiaries, including the estimated capital 
expenditures for environmental control facilities for the current 
fiscal year and any other material subsequent period; and
    (ii) 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 (such as, depending on the nature of the 
registrant's business and workforce, measures or objectives that 
address the development, attraction and retention of personnel).
* * * * *
    (h) Smaller reporting companies. A smaller reporting company, as 
defined by Sec.  229.10(f)(1), may satisfy its obligations under this 
Item by describing the development of its business pursuant to this 
paragraph (h). In describing developments under paragraphs (h)(1) 
through (3), information should be provided for the period of time that 
is material to an understanding of the general development of the 
business. Notwithstanding the provisions of Sec.  230.411(b) or Sec.  
240.12b-23(a) of this chapter as applicable, a smaller reporting 
company may only forgo providing a full discussion of the general 
development of its business for a filing other than an initial 
registration statement if it provides an update to the general 
development of its business disclosing all of the material developments 
that have occurred since the most recent registration statement or 
report that includes a full discussion of the general development of 
its business. In addition, the smaller reporting company must 
incorporate by reference, and include one active hyperlink to one 
registration statement or report that includes, the full discussion of 
the general development of the registrant's business. If the smaller 
reporting company has not been in business for three years, provide the 
same information for predecessor(s) of the smaller reporting company if 
there are any. This business development description should include:
* * * * *

0
3. Revise Sec.  229.103 to read as follows:

Sec.  229.103  (Item 103) Legal proceedings.

    (a) Describe briefly any material pending legal proceedings, other 
than ordinary routine litigation incidental to the business, to which 
the registrant or any of its subsidiaries is a party or of which any of 
their property is the subject. Include the name of the court or agency 
in which the proceedings are pending, the date instituted, the 
principal parties thereto, a description of the factual basis alleged 
to underlie the proceedings and the relief sought. Include similar 
information as to any such proceedings known to be contemplated by 
governmental authorities. Information may be provided by hyperlink or 
cross-reference to legal proceedings disclosure elsewhere in the 
document, such as in Management's Discussion & Analysis (MD&A), Risk 
Factors and notes to the financial statements.
    (b) No information need be given under this section for 
proceedings:
    (1) That involve negligence or other claims or actions if the 
business ordinarily results in such claims or actions, unless the claim 
or action departs from the normal kind of such claims or actions; or
    (2) That involve primarily a claim for damages if the amount 
involved, exclusive of interest and costs, does not exceed 10 percent 
of the current assets of the registrant and its subsidiaries on a 
consolidated basis. However, if any proceeding presents in large degree 
the same legal or factual issues as other proceedings pending or known 
to be contemplated, the amount involved in such other proceedings shall 
be included in computing such percentage.
    (c) Notwithstanding paragraph (b) of this section, disclosure under 
this section shall include, but shall not be limited to:
    (1) Any material bankruptcy, receivership, or similar proceeding 
with respect to the registrant or any of its significant subsidiaries;
    (2) Any material proceedings to which any director, officer or 
affiliate of the registrant, any owner of record or beneficially of 
more than five percent of any class of voting securities of the 
registrant, or any associate of any such director, officer, affiliate 
of the registrant, or security holder is a party adverse to the 
registrant or any of its subsidiaries or has a material interest 
adverse to the registrant or any of its subsidiaries;
    (3) Administrative or judicial proceedings (including proceedings 
which present in large degree the same issues) arising under any 
Federal, State, or local provisions that have been enacted or adopted 
regulating the discharge of materials into the environment or primarily 
for the purpose of protecting the environment. Such proceedings shall 
not be deemed ``ordinary routine litigation incidental to the 
business'' and shall be described if:
    (i) Such proceeding is material to the business or financial 
condition of the registrant;
    (ii) Such proceeding involves primarily a claim for damages, or 
involves potential monetary sanctions, capital expenditures, deferred 
charges or charges to income and the amount involved, exclusive of 
interest and costs, exceeds 10 percent of the current assets of the 
registrant and its subsidiaries on a consolidated basis; or
    (iii) A governmental authority is a party to such proceeding and 
such

[[Page 63761]]

proceeding involves potential monetary sanctions, unless the registrant 
reasonably believes that such proceeding will result in no monetary 
sanctions, or in monetary sanctions, exclusive of interest and costs, 
of less than $300,000 or, at the election of the registrant, such other 
threshold that (A) the registrant determines is reasonably designed to 
result in disclosure of any such proceeding that is material to the 
business or financial condition is disclosed, (B) the registrant 
discloses (including any change thereto) in each annual and quarterly 
report, and (C) does not exceed the lesser of $1 million or one percent 
of the current assets of the registrant and its subsidiaries on a 
consolidated basis; provided, however, that such proceedings that are 
similar in nature may be grouped and described generically.

0
4. Revise Sec.  229.105 to read as follows:

Sec.  229.105  (Item 105) Risk factors.

    (a) Where appropriate, provide under the caption ``Risk Factors'' a 
discussion of the material factors that make an investment in the 
registrant or offering speculative or risky. This discussion must be 
organized logically with relevant headings and each risk factor should 
be set forth under a subcaption that adequately describes the risk. The 
presentation of risks that could apply generically to any registrant or 
any offering is discouraged, but to the extent generic risk factors are 
presented, disclose them at the end of the risk factor section under 
the caption ``General Risk Factors.''
    (b) Concisely explain how each risk affects the registrant or the 
securities being offered. If the discussion is longer than 15 pages, 
include in the forepart of the prospectus or annual report, as 
applicable, a series of concise, bulleted or numbered statements that 
is no more than two pages summarizing the principal factors that make 
an investment in the registrant or offering speculative or risky. If 
the risk factor discussion is included in a registration statement, it 
must immediately follow the summary section required by Sec.  229.503 
(Item 503 of Regulation S-K). If you do not include a summary section, 
the risk factor section must immediately follow the cover page of the 
prospectus or the pricing information section that immediately follows 
the cover page. Pricing information means price and price-related 
information that you may omit from the prospectus in an effective 
registration statement based on Rule 430A (Sec.  230.430A of this 
chapter). The registrant must furnish this information in plain 
English. See Sec.  230.421(d) of Regulation C of this chapter.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
5. The authority citation for part 239 continues to read as follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m,78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107, Public Law 112-106, 126 
Stat. 312, unless otherwise noted.
* * * * *

0
6. Amend Form S-4 (referenced in Sec.  239.25) by revising paragraph 
(b)(3)(i) of Item 12 under Part I, Section B (``Information About the 
Registrant'') to read as follows:

    Note:  The text of Form S-4 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

United States Securities and Exchange Commission

Washington, DC 20549

Form S-4

Registration Statement Under the Securities Act of 1933

* * * * *

Part I

Information Required in the Prospectus

* * * * *

B. Information About the Registrant

* * * * *
    Item 12. Information with Respect to S-3 Registrants.
* * * * *
    (b) * * *
    (3) Furnish the information required by the following:
    (i) Item 101(c)(1)(i) of Regulation S-K (Sec.  229.101(c)(1)(i) of 
this chapter), industry segments, key products or services;
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
7. The authority citation for part 240 continues to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Public Law 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 
602, Public Law 112-106, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
8. Amend Sec.  240.14a--101 by revising paragraph (a) of Item 7 of 
Schedule 14A to read as follows:

Sec.  240.14a-101   Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 7. Directors and executive officers. * * *
    (a) The information required by Item 103(c)(2) of Regulation S-K 
(Sec.  229.103(c)(2) of this chapter) with respect to directors and 
executive officers.
* * * * *

    By the Commission.

    Dated: August 26, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-19182 Filed 10-7-20; 8:45 am]
 BILLING CODE 8011-01-P