What is Regulation S-K?

Regulation S-K outlines the categories of disclosures that every public company must make to its shareholders and potential investors in the US. Updated in November 2020 by the SEC, it aims to standardise the qualitative disclosures for companies so that investors can make more informed financial decisions around risk factors.

History of financial disclosures in the US

In the United States, the Securities and Exchange Commission (SEC) has set the regulatory framework for financial disclosure statements. Previously, the ‘XBRL regulation’ required disclosures but was ultimately not effective, since they were voluntary. The selected financial data could have been manipulated and failed to tell the full story.

Therefore, Regulation S-K has been introduced in order to bring mandatory reporting into the maelstrom of US financial institutions and to be prudential in nature, reducing gaps. 

Principles of Regulation S-K

There is another regulation (Regulation S-X) that focuses on the financial condition of a company. However, the overarching purpose of Regulation S-K is to enable investors to make more informed decisions with qualitative data, instead of pure financial statement information.

With so many different factors that can impact the decision to invest, these disclosures provide insight into human capital disclosure. This term refers to visibility around how personnel is attracted and retained, as well as taking individual responsibility for corporate crimes.

Under the new contractual obligations for reporting requirements, investors are able to have higher confidence in their decisions. 

Business nature

Details of the nature of the business must be declared, including past performance and, particularly, any changes or proposed amendments to future business plans.

The next Regulation S-K item focuses on the material cash requirements and properties held by the business, including land or other assets such as oil. These must therefore also be declared, as they may also impact an investor’s decision. 

Legal proceedings

Pending litigation or ongoing legal proceedings must also be declared to the public under Regulation S-K.

This is particularly important, as legal penalties can significantly impact the value and growth potential of investments. However, it also gives way to corporate governance, so that investors have more control over the direction of the companies they invest with.

With ESG investments at the forefront of the exchanges these days, this is sure to be a welcome change.

Financial data

Finally, details regarding the securities themselves must be shared, as well as the usual financial reporting requirements For example, financial institutions are expected to declare the description of share classes, alongside a prospectus that includes a level of risk factor disclosure.

The S-X side of regulation refers to solely financial information. These reporting requirements include generally-accepted accounting principles (GAAP), such as profit-and-loss statements, alongside market risk and major shareholder details. 

Significantly, Regulation S-K requires the presentation of data to be in a comparative graph over the course of the last 5 fiscal years. This has been accepted as the best way for investors to understand the true financial performance.

Who must comply with Regulation S-K?

Companies that are registered under the Securities Act of 1933 and Securities Exchange Act of 1934 are the first category required to comply with this newly introduced regulation. These two Acts already exist in order to provide insight to investors and prevent the misinformation and subsequent mis-selling of securities. 

Secondly, all other financial institution documentation associated with securities (such as anything received by security holders) will be regulated by SEC. These include annual reports, statements of transactions, and offers of tender, for example.

Human capital resources are in high demand, so being transparent about how workers are acquired and retained is incredibly important. Moreover, this regulation, in particular, is prudential in nature, which hopes to close the previous gaps in human capital disclosures. 

Disclosure rules continue to grow and evolve, especially as ESG factors come to the fore. Know the disclosure rules that matter for your business, now and for the future, with CUBE.