A roundup of the principal new rules and amendments promulgated by the SEC in 2020 that public companies with December 31 fiscal years should consider when preparing their Annual Reports on Form 10-K for 2020.
- Public companies should review the descriptions of their business, legal proceedings, and risk factors in light of the modernization amendments to Regulation S-K that became effective in November 2020.
- Public companies should consider permitted early compliance for new rules and amendments with respect to financial disclosures about acquired and disposed businesses and guarantors, and monitor the yet-to-be-determined early compliance dates for the MD&A changes announced in November.
- Public companies should consider whether duplicative or dated disclosure can be removed in connection with rule changes adopted by the SEC in 2020.
Over the course of 2020, the Securities and Exchange Commission (SEC) adopted a number of rule changes and amendments that public companies with December 31 fiscal years should consider when preparing their Annual Reports on Form 10-K for fiscal year 2020. In order to assist our clients, we summarize here the principal rule changes that affect the preparation of the 2020 Form 10-K, including the following:
- Item 1 (Description of Business)
- Item 1A (Risk Factors)
- Item 3 (Legal Proceedings)
- Cover Page
- Signature Requirements
Modernization of Regulation S-K Items 101, 103 and 105
The SEC adopted the following key changes to Items 101, 103 and 105 of Regulation S-K that became effective on November 9, 2020. For more detailed information on these changes, see our separate client alerts available here and here.
Description of Business (Regulation S-K Item 101)
- Principles-Based Approach: The SEC replaced the previous requirement to provide a description of the general business development of the public company over the last five years with a principles-based approach that is not limited to a specific time frame, requiring public companies to instead discuss information material to understanding their business. Once a public company has made the necessary disclosures required under Item 101, future disclosures can be limited to material changes that occurred during the relevant reporting period so long as one (but not more than one) hyperlink to the original disclosure is included. Because only one hyperlink may be included, public companies with frequent material updates may instead decide to provide the full disclosure in each filing (or every few filings) to increase the readability of the business description.
- Elimination of Specific Disclosure Topics: The SEC has eliminated the list of topics that public companies should discuss in favor of a principles-based approach, calling for a discussion of topics material to an understanding of the company’s business.
- Human Capital Resources and Compliance with Government Regulations: Public companies are now required to describe their human capital resources, including the number of persons employed, and the effects of compliance with all government regulations (rather than only environmental regulations), where those discussions are material to their business as a whole.
Legal Proceedings (Regulation S-K Item 103)
- Cross-References & Hyperlinking: The requirement to disclose material legal proceedings in a Form 10-K may now be satisfied through one or more hyperlinks or by cross-referencing to discussions of legal proceedings located elsewhere in the document, including MD&A, risk factors, or a note to the financial statements, to avoid duplication.
- Threshold for Environmental Proceedings: The threshold for disclosure of environmental proceedings to which the government is party has been increased from $100,000 to $300,000. Public companies are also permitted to choose a higher materiality threshold so long as it does not exceed the lesser of $1 million or one percent of the current assets of the company on a consolidated basis.
Risk Factors (Regulation S-K Item 105)
- Summary Risk Factor Disclosure: Public companies are now required to include a summary of the risk factors discussed in the Form 10-K if the “Risk Factors” section in such document exceeds 15 pages. Such summary is not permitted to exceed two pages, is required to appear in the forepart of the report (which is interpreted by the SEC Staff to be at the beginning of the report and not at the beginning of the Risk Factors section) and should include bulleted or numbered statements that concisely summarize the principal risk factors affecting the company.
- Materiality: Only material risks should be included in risk factors, rather than the “most significant risks,” with the goal of reducing “boilerplate” disclosure that could apply to most companies.
- Organization: Risk factors must now be organized under relevant headings, with risk factors that could apply generally to any investment in securities required to appear at the end of the risk factor section under a separate caption entitled “General Risk Factors.”
Changes to Cover Page of Form 10-K
As discussed in a previous client alert, the SEC added a new checkbox to the cover page of Form 10-K (which gets inserted after the last checkbox on the cover page relating to emerging growth companies) relating to auditor attestation of internal control, as follows:
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Modernization of Rules Governing Electronic Signatures for Filings on EDGAR
The SEC modernized the rules related to electronic signatures for documents filed on EDGAR, allowing for public companies to eliminate the need for “wet” signatures on filed documents. Public companies must obtain and retain from each signatory a manually signed attestation form acknowledging that their electronic signature is the legal equivalent of their manual signature. Public companies may thereafter use electronic signatures for documents both internally as well as for filing on EDGAR so long as the process:
- requires the signatory to present a physical, logical, or digital credential that authenticates the signatory’s individual identity;
- reasonably provides for non-repudiation of the signature;
- provides that the signature be attached, affixed, or otherwise logically associated with the signature page or document being signed; and
- includes a timestamp to record the date and time of the signature.
Early Permitted Adoption of Other Rule Changes
The SEC adopted a series of other new rules and amendments in 2020 that become effective after December 31, 2020, but which permit early adoption. Public companies accordingly should be aware of the changes with respect to the following to the extent they wish to take advantage of early adoption:
- Financial disclosures about guarantors and issuers of guaranteed securities and affiliates whose securities collateralize a registrant’s securities (as discussed in our separate client alert available here).
- Financial disclosures about acquired and disposed businesses (as discussed in the SEC’s press release).
In addition, in November 2020, the SEC adopted a number of amendments to the selected financial data, supplementary financial data and MD&A requirements in Items 301, 302 and 303 of Regulation S-K, which would be expected to have a meaningful impact on future Annual Reports on Form 10-K. However, these amendments have not yet been published in the Federal Register as of the date of this client alert, and early compliance is not permitted until 30 days after such publication (with mandatory compliance not required until much later). These rule changes were summarized in the SEC’s press release and Pillsbury will be issuing a forthcoming client alert summarizing these changes.