SEC Chairman Jay Clayton has previously described its disclosure framework as “rooted in the following principles: (1) materiality; (2) comparability; (3) flexibility; (4) efficiency; and (5) liability. Under this framework, he noted, disclosure requirements must evolve over time to reflect changes in markets and industries. Many of the provisions of Regulation S-K arose when the most valuable assets on companies` balance sheets were mainly fixed assets such as tangible fixed assets. Today, the most valuable assets of many companies are human capital, intellectual property, and other intangible assets. While Clayton has continued to view the pillars of the current disclosure framework as the right ones, the SEC must recognize when value factors have changed and reconsider the type of information to be evaluated under the framework. The final amendments reflect some of these efforts. Looking ahead: Registrants must comply with the amended rules beginning with the first fiscal year ending 210 days after they are published in the Federal Register (the “mandatory compliance date”). Registrants must apply the amended rules in a registration statement and prospectus, which must contain financial statements as of the initial filing date for a period after the mandatory compliance date. While registrants are not required to apply the amended rules on their mandatory compliance date, they may comply with the final amendments at any time after 30 days of publication, provided they provide a disclosure that addresses an amended item in its entirety. However, she noted that the SEC “takes the position that it does not need to require or specify these types of disclosures because our principles-based disclosure system is in the workplace and will produce all disclosures on these matters that are important. Investors are encouraged to believe that every company has evaluated the materiality of these complex issues with impeccable accuracy and objectivity. But, she asks, hundreds of companies don`t include diversity disclosure — should we assume it`s not important? As Lee once wrote (with former commissioner Robert Jackson), while issuers prefer “the discretion afforded to them by principles-based disclosure,” investors “prefer a balanced approach using certain disclosure rules.” While a principles-based approach provides flexibility and makes “sense in some cases,” the costs must be weighed against the benefits. One cost factor could be the discretion “it gives to the company`s leaders.

on what they tell investors. Another is that it can produce inconsistent information that investors can`t easily compare, making analyzing investments – and therefore capital – more expensive. Specifically, the SEC eliminated the requirement for certain financial information (Section 301), simplified the requirement to disclose supplemental financial information (Section 302), and adopted certain amendments to Management`s Discussion and Analysis on Financial Condition and Results of Operations (Section 303). These new rules apply to registration statements and periodic reports. In addition, some of the rule changes consist of a codification of the existing SEC guidelines or an attempt to clarify some of the guidance on the rules of Regulation S-K. Many take a principles-based approach rather than a prescriptive approach, which allows companies to decide how best to communicate important information to investors. The SEC has adopted certain parallel amendments that apply to foreign private issuers (REITs), including Forms 20-F and 40-F, in addition to other compliant amendments applicable to SEC rules and forms. As mentioned above, Commissioners were divided in their views on passing the final amendments, with Commissioners Allison Lee and Caroline Crenshaw disagreeing. And beyond political beliefs, much of that divergence was based on the fundamental question of whether rules should be primarily principled or contain additional normative elements. The considerable disagreement among SEC commissioners over the final changes was not so much what was required by the new rules as what was not required.

Lee and Crenshaw were appalled by the silence of the new rules on two issues they considered critical – diversity and climate risk. Not that the other commissioners were necessarily opposed to the disclosure of these issues (although some may have been). Instead, they preferred not to include mandatory requirements that specifically prescribed disclosure of diversity and climate-related risks, opting instead for a principles-based disclosure system that would only trigger a discussion on these issues to the extent that disclosure was important in the company`s view. In other respects, however, the final changes merely reflect, as Clayton put it, the “deferred maintenance” of the rules, thereby eliminating long-outdated normative requirements. While this modernization is certainly welcome, it remains to be seen to what extent disclosure will change significantly as a result of these changes. To some extent, the amendments merely update the rules to reflect current practices, rather than introduce new elements. For example, the final amendments extend the current requirement to discuss environmental regulations to all essential government regulations, a practice that many companies are currently observing. More generally, for many years, the current rules regarding the business narrative have served less as a design guide to get the basic narrative about the business and more as a checklist for following the rules after creation.