An Update on the SEC’s Disclosure Effectiveness Project
Shareowners rely on corporate disclosures to make investment and voting decisions. However, these disclosures quite often lack the detail and insight that shareowners desire. As required by the Jumpstart Our Business Startups (JOBS) Act, the SEC is currently undergoing a review of required corporate disclosures with their Disclosure Effectiveness Project.
In December 2013, the SEC issued a report to Congress summarizing its initial review of the corporate disclosures required under Regulation S-K, which governs the reporting requirements for Forms S-1, 10-K, 10-Q, 8-K and proxy statements. In this initial review, the SEC has chosen to focus on the S-1 and 10-K and 10-Q, leaving an overhaul of the proxy statement requirements for a later time (the rules governing the Form 8-K were revised recently in conjunction with the implementation of the Sarbanes-Oxley Act). In addition to providing the historical background of many important areas of disclosure in Forms S-1 and 10-K, the report presents the SEC staff’s recommendations for further review of disclosure reform.
One recommendation calls for any revised disclosure rules to eliminate the need for duplicative information. There are several examples under the current reporting regime where similar information is required in two different places in a company’s SEC filings (e.g., in the MD&A and in a footnote to the financial statements). Not only is this cumbersome for the companies preparing the documents, but it also can be misleading for the shareowners and other users. The SEC plans to work with the Financial Accounting Standards Board to eliminate requirements for duplicative information to the extent possible.
Another recommendation made by the SEC calls for companies to focus on information that is material for making investment and voting decisions. The current disclosure rules require information that may no longer be important to investors or that is readily available elsewhere (e.g., historical stock price information). When considering this issue, the SEC staff has suggested that “any recommended revisions should emphasize a principles-based approach . . . while preserving the benefits of a rules based system affording consistency, completeness and comparability of information” across companies.1
A third recommendation addresses the issue of changes in technology and the potential for the disclosure requirements to be “flexible enough to adapt to dynamic circumstances.”2 Included in this review, the SEC will explore ways to better use technology to deliver company information, “both through the EDGAR system and other means.”3 They will also “consider ways to present information that would improve the readability and navigability of disclosure documents.”4
Upon the release of this report, SEC Chair Mary Jo White said that the SEC “will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented.”5 Approximately 30 organizations have submitted Comment Letters to date.6
More recently, the SEC has called for companies to be proactive and make changes to their filings before it is required. Several companies have taken this initiative and provided a higher level of disclosure than currently required. In 2014, the Council of Institutional Investors issued reports highlighting companies that have the “Best Disclosure” regarding board evaluations and director qualifications and skills.7
While many shareowners agree that improved disclosure will be beneficial, they may also have concerns regarding the implications of changes to disclosure requirements. Institutional investors that have holdings in hundreds, if not thousands, of U.S. companies must manage all of the data provided in the SEC disclosures filed by these companies to make voting and investment decisions. When the disclosure requirements call for more descriptive discussions about corporate practices and performance, it becomes more difficult to capture the data and to analyze it for voting and investment purposes.
Annalisa Barrett, Senior Advisor at ValueEdge Advisors, is also a Clinical Professor of Finance at the University of San Diego’s School of Business Administration. She teaches graduate courses in Corporate Governance and undergraduate courses in Financial Management, Financial Statement Analysis and Personal Finance. Her research interests focus on corporate governance practices, board composition and director demographics. She is the author of numerous reports and articles that have been published in a variety of practitioner journals. She has also been quoted in several periodicals, and her research has been featured on the front page of The Wall Street Journal.
1 U.S. Securities and Exchange Commission, Report on Review of Disclosure Requirements in Regulation S-K, December 2013, at 98.
2 Id. at 93.
3 Id. at 98.
4 Id. at 98-9.
5 SEC press release dated December 20, 2013, available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540530982#.VM8N1KPTnDc.
6 Comment Letters are available for review at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
7 These reports are available to the public on the CII’s website at http://www.cii.org/special_reports.