The Securities and Exchange Commission’s project to revise securities disclosures aims to reduce redundancies and companies’ related costs, and it may provide them with greater discretion over the types of information disclosed. But there’s rub: it may also require companies to make new disclosures.
The SEC’s Division of Corporate Finance announced in April that it was beginning an initiative to review disclosure effectiveness with the intent of presenting recommendations to the commission.
“Although we believe that these efforts can reduce the costs and burdens on companies, updating the requirements may very well result in additional disclosures,” said Keith F. Higgins, director, Division of Corporate Finance, in a speech at the recent George A. Leet Business Law Conference, held at the Case Western Reserve University School of Law.
Mr. Higgins noted that full and fair disclosure has been a central goal of the US securities laws for more than 80 years. “And given the complexity of modern companies, the need for such disclosure has probably never been greater.
Mr. Higgins didn’t mention a timeline for the initiative, and an SEC spokesperson declined to comment on it. However, Mr. Higgins did note several areas the agency is considering that “could translate into cost savings for issuers and better disclosure for investors. He pointed to overlapping disclosures in Regulation S-K and GAAP that may result in repetition in filings.
“As examples, some of pointed out that the SEC and the Financial Accounting Standard Board (FASB) require similar information to be disclosed about legal proceedings, off-balance sheet arrangements, market risk sensitive derivative instruments and share repurchases,” he said. He added, “The staff is meeting regularly with FASB representatives to discuss joint efforts to reduce the amount of overlap and we look forward to continued coordination.”
Mr. Higgins noted that some companies have significantly changed their proxy statement presentations in recent years to enhance disclosures for investors. He added the SEC wants to encourage companies to “make similar strides with their periodic reports—experiment with the presentation, reduce duplication and eliminate stale information that is both outdated and not required.”
More generally, Mr. Higgins said, the SEC is considering whether its recommendations should focus on a more principles-based approach, giving companies more flexibility to provide disclosures that they believe are material to investors. He noted that many have called the management discussion and analysis (MD&A) disclosures the most principles-based to date, but it, too, is “ripe” for re-examination.
For example, period-to-period comparisons could be streamlined, perhaps focusing on the most recently completed fiscal period and the comparison to the prior year. The concern is that such a change could mask trends, although the current disclosure system already requires the disclosure of known trends and uncertainties “so companies should include this disclosure when applicable.”
Sitting down to read the daily paper each morning is unimaginable to many people today, Mr. Higgins said, thanks to the Internet, which people can access at their convenience. “Change is often difficult, but in this increasingly paperless society—should the disclosure regime continue to be based on forms that are filed periodically?” he said.
For example, he said, the “company file” approach is an alternative that is “gaining traction.” It would require companies, in lieu of filing a period report, to update information on the same time schedule as currently required for filings. That information could be displayed on the SEC’s website under display tabs such as “business information,” “financial information,” and “governance information,” instead of a chronological list of filings.
Other questions the SEC is asking, he said, include: Can the SEC make it easier for investors to access, search and sort information? Should hyperlinks to documents be required in the exhibit index? And is there static information that a company should be permitted to include on its website instead of filing it with the agency?
“Although the [division] has quite a full agenda with our mandated rulemakings under the Dodd-Frank Act and the JOBS Act, we recognize that the time is ripe for reviewing the disclosure regime to make it work better both for investors and companies,” Mr. Higgins said.