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Oct 25, 2019

GM balks at SEC’s disclosure update plan

Commission proposes changes to description of business, legal proceedings and risk-factor disclosures under Regulation SK

General Motors (GM) officials have raised concerns about aspects of SEC plans to revamp corporate disclosures.

The commission in August proposed to change rules – often in a principles-based direction – to update the description of business, legal proceedings and risk-factor disclosures companies must make under Regulation SK. The idea is to improve disclosures for investors and simplify compliance efforts for issuers.

The proposed amendments would, among other things, relate to Item 101(c), which covers the narrative description of the business. They would clarify and expand its principles-based approach by including disclosure topics drawn from a subset of the topics already included in the item.

The revised Item 101(c) would include as a disclosure topic human capital resources such as 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 business. Depending on the nature of the company’s business and workforce, these would be measures or objectives that address the attraction, development and retention of personnel.

The amended Item 101(c) would also refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.

In a recent letter to the agency, GM’s Christopher Hatto, vice president, controller and chief accounting officer, and Rick Hansen, assistant general counsel and corporate secretary, write that they support the SEC efforts to modernize its rules and are generally supportive of taking a more principles-based approach to disclosure.

But they disagree with certain elements of the proposal, such as the expansion of Item 101(c) to require the disclosure of material changes to business strategy. They argue that investors can already get a clear picture of GM’s strategy from its MD&A. The company also regularly uses other public forums to tell investors about its strategy, such as quarterly earnings press releases, analyst calls, investor presentations and other investor events, they write.

‘Taken together, these disclosures provide investors with ample opportunity to receive quarterly updates on our business strategy in a location and format that is convenient for investors and where investors following public companies are accustomed to obtaining this information,’ Hatto and Hansen write.

The SEC’s existing disclosure framework added to standard investor communications practices already provides sufficient disclosure about business strategy and any material changes to that strategy, they add.

‘Further, we are concerned that a new, separate disclosure requirement related to material changes in business strategy could result in GM and others being forced to disclose proprietary or sensitive information about its strategy well before a registrant knows how, or even if, such strategy will materially impact its financial results or condition,’ Hatto and Hansen say.

Such ‘premature disclosures’ would not only harm the company’s competitive position but may also produce disclosure that is not particularly meaningful and could be misleading, they add, suggesting that the commission drop the proposed requirement.

The GM officials further disagree with the proposed expansion of Item 101(c) to require the disclosure of the material effects of compliance with all domestic and foreign government regulations rather than just environmental laws.

‘While we agree it is critically important to disclose to investors the material impacts on our business of complying with non-environmental laws, we believe that if such a requirement were to be included in Item 101(c) of Regulation SK, registrants would feel obligated to provide an exhaustive list of all domestic and foreign laws and regulations to which they are subject, resulting in lengthy, immaterial and unhelpful disclosure,’ Hatto and Hansen write. 

They add that this change might also lead to companies feeling they must add more details to risk factors relating to regulatory risk, which would conflict with the proposal’s aim of improving the readability of disclosure documents.

At present, companies need to report only the number of their employees. But human capital is attracting a growing level of attention among investors and other groups. The SEC, which is proposing disclosure on the topic, notes in its rulemaking proposal that the agency’s 2016 concept release on updating corporate disclosures solicited and received feedback on human capital.

In addition, the Human Capital Management Coalition in July 2017 filed a rulemaking petition requesting that the SEC require registrants to disclose information about their human capital management policies, practices and performance.

The GM officials write that they believe human capital matters are of interest to some of the company’s investors and stakeholders, and that the company addresses this in the ‘talent’ section of its annual sustainability report. ‘However, we believe the commission’s proposal to expand Item 101(c)(xiii) of Regulation SK to require human capital disclosure would not further the goals of the proposed rule, which are to improve these disclosures for investors, and to simplify compliance efforts for registrants.’

First, they argue, adding human capital measures as a separate disclosure item in the business section is unnecessary because this information, to the extent it is necessary to an investor’s understanding of a company’s business, must already be disclosed under Item 303(a) and Item 105. For example, issuers often include risk-factor disclosure describing the ‘challenges of integrating, developing and motivating a rapidly growing employee base’ or that they ‘must attract and retain highly qualified personnel,’ according to Hatto and Hansen.

Second, they write that the inclusion of human capital matters in Form 10K would create new timing and operational challenges. Many companies release detailed human capital information outside of the 10K, such as in the proxy statement or a separate report. But they would not be able to do so within 10K filing deadlines because such detailed information must be gathered from a variety of sources and doing so would require new disclosure controls and in-depth internal and external audit procedures, the GM officials write.

‘Because many registrants are already providing this disclosure in the 10K, to the extent material, and are providing extensive additional disclosure in other investor materials, we believe the commission should take an alternative approach,’ they say. ‘Due to the swiftly evolving and highly company-specific nature of human capital resources disclosure, we believe the commission’s issuance of interpretive guidance, such as that provided on cyber-security and climate change, would be particularly helpful to registrants.’