Is the Disclosure Pendulum Swinging Back?

At the beginning of this year, I blogged about the SEC Staff Report on Public Company Disclosure issued on December 20, 2013, which has an ambitious goal of modernizing and simplifying the disclosure that public companies are obligated to provide, but it was unclear how soon the SEC will start moving forward with this initiative.

On April 11, 2014, when Keith F. Higgins, Director of the SEC Division of Corporation Finance, delivered his speech on disclosure effectiveness before the ABA Business Law Section Spring Meeting, it has become clear that the SEC is going to take a close look at existing disclosure requirements soon. Mr. Higgins said that Chair White had asked the Division to “lead the effort to develop specific recommendations for updating the disclosure requirements.” However, Mr. Higgins was also very clear that “reducing the volume of disclosures” is not going to be the “sole end game” of this project. If the SEC identifies “potential gaps in disclosure or opportunities to increase the transparency of information,” it may “recommend new disclosure requirements.”

Mr. Higgins provided a roadmap of the disclosure project that is being undertaken by his Division. It will start with the Division’s review of Regulation S-K requirements related to (i) business and financial disclosures that flow into Forms 10-K, 10-Q and 8-K and transactional filings, (ii) industry guides and form-specific disclosures, and (iii) scaling of disclosure provided by smaller reporting companies and emerging growth companies. The Division will also look at Regulation S-X requirements related to acquired businesses and guarantors, differences in the disclosure requirements under the Securities Act of 1933 and Securities Exchange Act of 1934 as well as the overlap between the GAAP requirements in the footnotes to the financial statements and the SEC requirements. The Division will also explore whether the focus and navigability of disclosure documents can be improved by using structured data or hyperlinks.

While it will obviously take some time to review the areas described above and implement changes through the rulemaking process, Mr. Higgins included in his speech a “Call to Action” for public companies to improve their disclosure now. He posed a few fresh questions for the audience:

“Before you repeat anything in a filing, please step back and ask yourself — do I need to say it again?”

If a company includes new disclosure because a client alert says that it is a “hot button” issue for the Staff, “the first question should be ‘does this issue apply to the company?’”

The point that Mr. Higgins was making was that public companies should:

  • reduce repetition in an SEC filing (for ex., by using cross-references);
  • focus their disclosure on matters that actually apply to the company as opposed to including disclosure only because other public companies have done so or a client alert recommended it; and
  • eliminate outdated or immaterial information from the filings, even if such information is “sacred” because it was included in response to prior SEC comments.

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