SEC Increasing Reporting Threshold for Environmental Liabilities
Proposed changes to SEC reporting requirements increase the threshold for disclosing environmental penalties and other material environmental information from $100,000 up to $300,000 and potentially higher. The SEC is taking comments on this and other modifications through Oct. 22.
Since 1971, companies subject to Securities and Exchange Commission reporting have been required to disclose certain environmental obligations to aid investors looking to make informed decisions. In 1982, the threshold for reporting those obligations was set at $100,000. Now, for the first time in more than 30 years, the SEC is proposing changes to Regulation S-K that would increase the reporting threshold. While this increase will not impact the necessity to disclose large environmental obligations, it can reduce disclosure costs and some reporting burden resulting from smaller environmental liabilities. The SEC integrates all of the required disclosures into Regulation S-K. Two sections regulating nonfinancial disclosures, Item 103: Legal Proceedings and Item 101: Description of Business are particularly relevant for environmental disclosure and are highlighted here.
Disclosures of Material Legal Proceedings
Item 103: Legal Proceedings (17 C.F.R. § 299.103) applies to pending legal proceedings and requires disclosure of “material” litigation, i.e., other than “ordinary routine litigation incidental to the business.” Instruction 5 to this item designates an environmental penalty of $100,000 or greater as not being “ordinary” litigation. Thus, the SEC requires disclosure of 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.
The $100,000 threshold was based in part on actual fines assessed in environmental proceedings in 1981. The SEC concluded that disclosure of fines by governmental authorities may be of particular importance in assessing a registrant’s environmental compliance problems. Since it has been over 30 years and the monetary threshold has not been adjusted, the SEC proposal considers inflation and raises the bar accordingly.
A monetary threshold is not the only approach the SEC could take. In its current proposal, the agency considered replacing the dollar amount with a general subjective standard to determine whether legal proceedings were material enough to report. Supporters of this approach believe it would best reduce the reporting burden while still providing information determined to be material to investors. In an attempt to balance benefit to investors with the burden of reporting, the SEC decided to stick with the bright-line threshold and called it “a useful benchmark to determine whether complex environmental proceedings should be disclosed.” Although the increased limit will exclude many administrative fines imposed by environmental agencies, these are not likely to be material to investment decisions.
The SEC also considered raising the threshold beyond the proposed $300,000 limit and is taking comment on whether to adopt an alternative threshold, such as $500,000, $750,000, or even $1,000,000. The agency also is requesting comment on whether the inflation-adjustment approach is the right one or whether a materiality (or some other approach) should be used instead.
Disclosure of Material Environmental Obligations
Item 101: Description of Business (17 C.F.R. § 229.101) requires companies to disclose the material effects of compliance with federal, state, and local environmental laws on their capital expenditures. The proposed change is to Item 101(c)(1)(xii) requiring a description of the registrant’s business to provide more flexibility to determine the appropriate timeframe for disclosure of estimate capital expenditures for environmental control facilities. Taking what it refers to as a more “principles-based” approach, the SEC is proposing to modify the current regulation to be less prescriptive. Currently, disclosure of estimated capital expenditures for environmental control facilities is required if such expenditures are material and must be reported for the current fiscal year, succeeding fiscal year, and any other periods the registrant deems material.
The proposed revisions would eliminate the prescriptive requirement to disclose for the succeeding fiscal year; instead, they would provide the registrant with the flexibility to determine whether expenditures during that period of time are material. In deciding on a principles-based approach, the SEC also considered but rejected a more prescriptive approach that would have expanded the disclosure requirements to include more details and include additional specific expenditures.
Proposed Changes Impact on Climate Risk Reporting
The principles-based approach versus a prescriptive-based approach may be relevant to shareholders and investors concerned about climate change reporting. This SEC proposal does not address issues related to climate change, as it decided to select the more principles-based approach, leaving it to each regulated company to determine whether climate information is material. The agency is taking comment on whether the principles-based approach to disclosure will provide the right amount of information to evaluate environmental risks. This could be an area of interest for shareholders and investors looking for more climate disclosure.
Companies wishing to weigh in on the SEC proposal should do so by Oct. 22. Full text of the regulation is available at 84 Fed. Reg. 44,358, Aug. 23, 2019.
©2019. Published in Bloomberg BNA, Online, September 27, 2019, by the Bureau of National Affairs, Inc. Reproduced with permission. All rights reserved.