An Update on the SEC’s Disclosure Effectiveness Initiative: Concept Release on Business and Financial Disclosure
Investors rely on periodic disclosures provided by companies to make investment and voting decisions. The SEC has regulatory authority over these disclosures, and they are currently reviewing their guidance with their “Disclosure Effectiveness Initiative.”1 In April 2016, the SEC issued a Concept Release under this program specifically addressing the business and financial disclosure provided in periodic reports. The release addresses copious issues ranging from the broad (e.g., considering whether a principles-based or rules-based approach is best) to the specific (e.g., evaluating certain line items for usefulness). Upon its release, SEC Chair Mary Jo White was quoted as saying that
According to the SEC, “Some investors and interest groups also have expressed a desire for greater disclosure of a variety of public policy and sustainability matters . . . .”3 Specifically, the SEC is seeking input on whether or not investors take sustainability and public policy matters into account when making investment and voting decisions. If in fact they are taken into consideration, the SEC wants to know which public policy and sustainability issues would be best addressed via required disclosure. In addition, they want to understand the potential burdens placed on the companies that prepare the disclosures.
While most large U.S. companies have recently formalized their reporting of this information, such disclosures are voluntary and do not follow a standardized format. Summarizing the messages of several comment letters submitted on this topic, the SEC stated that “[s]ome commenters criticized the primarily voluntary nature of current corporate sustainability reporting and stated their belief that information made available to investors is inconsistent and incomplete.”4
Most of the comment letters sent to the SEC on this topic were in support of requiring some level of mandatory disclosure on these issues. However, some opposed the idea, stating that sustainability issues “‘are not typically material to an understanding of the company’s financial performance.’”5
To be sure, the term sustainability is broad and can refer to a variety of different topics. The SEC acknowledges this issue and lists the following as some of the key topics to be considered:
• Climate change
• Resource scarcity
• Corporate social responsibility
• Good corporate citizenship
With regard to the topic of climate change specifically, the SEC would like to know if “existing disclosure requirements [are] adequate to elicit the information that would permit investors to evaluate material climate change risk.”6
The term public policy can also encompass many different issues. Recently, public policies such as the use of conflict minerals and mine safety have been addressed by new mandatory disclosures required under the Dodd-Frank Act. Currently, the SEC is facing pressure to require mandatory disclosure of political spending by companies.
Another notable topic addressed in the Concept Release is whether disclosure requirements should be principles based (which “require disclosure when information is material to investors” and allow “management to exercise judgment”) or prescriptive based (which “employ objective, quantitative thresholds to identify when disclosure is required” and are often referred to as “rulesbased”).7 A third approach proposed by the SEC is referred to as an objectives-oriented approach, under which new disclosure rules would be developed by the SEC “clearly articulating the accounting objective of the standard and providing sufficient detail and structure so that the standard can be applied on a consistent basis.”8
In requesting comments on all of these issues, the SEC is seeking suggestions on how to create flexible but meaningful disclosure requirements that benefit investors without causing undue burden.
1 More information about the SEC’s Disclosure Effectiveness Initiative can be found here: https://www.sec.gov/spotlight/disclosure-effectiveness.shtml; see also article entitled An Update on the SEC’s Disclosure Effectiveness Project in the Q2 2015 issue of On the Record with Robbins Geller.
2 SEC Press Release, SEC Solicits Public Comment on Business and Financial Disclosure Requirements in Regulation S-K (Apr. 15, 2016), http://www.sec.gov/news/pressrelease/2016-70.html
3 SEC Concept Release, Business and Financial Disclosure Required by Regulation S-K, at 204, https://www.sec.gov/rules/concept/2016/33-10064.pdf
4 Id. at 206.
5 Id. at 207.
6 Id. at 215.
7 Id. at 34-35.
8 Id. at 43.