SEC Proposes Changes to Reporting Regulations Impacting Environmental Disclosures

For the first time in over 30 years, the Securities and Exchange Commission (SEC) has proposed amendments to modernize its regulation requiring registrants to report environmental penalties and certain other environmental information. 84 Fed. Reg. 44358 (Aug. 23, 2019).

Companies subject to SEC requirements have long been obligated to disclose environmental penalties of $100,000 or greater. This requirement appears in Regulation S-K, Item 103, 17 C.F.R. § 229.103. That regulation refers to disclosure of “material” litigation, i.e., other than “ordinary routine litigation incidental to the business”:

Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.

Instruction 5 to this item specifically designates an environmental penalty of $100,000 or greater as not being “ordinary” litigation:

Notwithstanding the foregoing, … an administrative or judicial proceeding … arising under any Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primary for the purpose of protecting the environment shall not be deemed “ordinary routine litigation incidental to the business” and shall be described if…

C. A governmental authority is a party to such proceeding and such proceeding involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $100,000; provided, however, that such proceedings which are similar in nature may be grouped and described generically.

The SEC’s proposal would raise that level to $300,000. It also requests comments on whether that threshold should be adjusted periodically for inflation.

Other proposed changes would update the requirements in Regulation S-K to disclosure business, legal proceedings, and risk factors. The proposal’s objective is to improve the readability of disclosure documents, discourage repetition and disclosure of information that is not material, and improve the disclosure process for both investors and registrants.

One update, in particular, is relevant to environmental reporting. It would revise Item 101(c)(1)(xii), requiring the description of the registrant’s business, to provide more flexibility to determine the appropriate time period for disclosure of estimated 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. The proposal requests comment specifically on whether this approach will elicit the appropriate level of disclosure about environmental risks.

Comments on the SEC proposal are due by October 22, 2019.

Beveridge & Diamond helps clients around the world resolve critical environmental and sustainability issues relating to their products, facilities, and operations. Our experience includes advising companies on compliance with environmental disclosure requirements, such as those imposed by the SEC.For more information, please contact the authors.