During the last decade, I have been continuously amazed with the increasing level of public company regulation. The general direction of the Sarbanes-Oxley Act and the Dodd-Frank Act, and naturally the SEC rules implementing these acts, has always been more and more disclosure (the more granular and detailed — the better). It seemed like the disclosure pendulum was swinging higher and higher towards overregulation and that it would never go back. But the report on public company disclosure issued by the SEC on December 20, 2013, as mandated by the JOBS Act, gives a lot of hope that the disclosure pendulum may eventually start swinging back.
This Report on Review of Disclosure Requirements in Regulation S-K, which largely follows the concepts outlined by SEC Chair Mary Jo White in her October speech before the National Association of Corporate Directors, recommended to Congress a comprehensive review of SEC disclosure rules and forms focusing on the following potential areas:
- modernizing and simplifying Regulation S-K requirements in a manner that reduces the costs and burdens on companies while still providing material information;
- eligibility for further scaling of disclosure requirements and definitional thresholds for smaller reporting companies, accelerated filers and large accelerated filers;
- evaluating whether Industry Guides still elicit useful information and conform to industry practice and trends;
- reviewing financial reporting requirements of Regulation S-X and financial statement disclosure requirements of Regulation S-K (e.g., annual and quarterly selected financial data disclosure and the ratio of earnings to fixed charges); and
- disclosure requirements contained in SEC rules and forms (e.g., Forms 10-Q and 8-K).
The Staff provided detailed guidance on its suggested review of Regulation S-K, which would address the following issues:
- principles-based approach as an overarching component of the disclosure framework (e.g., using a disclosure model of current MD&A requirements) (which may have an unintended consequence of leading to more disclosure rather than less);
- current scaled disclosure requirements and whether further scaling would be appropriate for emerging growth companies or other categories of issuers;
- filing and delivery framework based on the nature and frequency of the disclosures (e.g., a “core” disclosure or “company profile” filing with information that changes infrequently, periodic and current disclosure filings with information that changes from period to period, and transactional filings that have information relating to specific offerings or shareholder solicitations); and
- readability and navigability of disclosure documents (e.g., the use of hyperlinks) as well as replacing quantitative thresholds (e.g., Item 103 (Legal Proceedings), Item 404 (Transactions with Related Persons, Promoters and Certain Control Persons) and Item 509 (Interests of Named Experts and Counsel) with general materiality standards.
In addition to these issues, the Staff identified the following specific areas of Regulation S-K disclosure that could benefit from further review:
- risk-related requirements, such as risk factors, legal proceedings and other quantitative and qualitative information about risk and risk management, with potential consolidation into a single requirement;
- relevance of current requirements for the description of business and properties;
- corporate governance disclosure requirements (to confirm that the information is material to investors);
- executive compensation disclosure (to confirm that the required information is useful to investors);
- offering-related requirements (in light of the changes in offerings and the shift from paper-based offering documents to electronically-delivered offering materials); and
- exhibits to filings (to confirm whether the required exhibits remain relevant and whether other documents should be added).
I cannot wait for the SEC to start proposing rules implementing these suggestions and creating a more effective disclosure mechanism that would work for the 21st century.