At an open meeting this morning, the SEC (all three of them) voted to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Reg S-K, part of the SEC’s disclosure effectiveness review project. Reg S-K is 30 years old, and evolving business models and the introduction of new technology, together with changes in the concerns and interests of investors, have created the need for a review of business and financial disclosures in periodic reporting. Chair White said that a review of compensation and governance requirements is also on the SEC’s agenda.
Although the concept release has not yet been posted nor have any of the Commissioners’ remarks, the presentations and discussion at the meeting indicated that the release will address three basic topics: framework, line items and presentation and delivery.
Framework. The staff observed that, although there are some prescriptive and structured elements, the current requirements are largely principles-based, with disclosure determined on the basis of “materiality” as defined in TSC Industries, Inc. v. Northway, Inc., specifically, whether there is a substantial likelihood that a reasonable investor would consider the information important in decision-making and whether a reasonable investor would view the information to significantly alter the “total mix” of information available. However, Chair White also recognized the importance of not burying material information in an avalanche of trivia. Considering the costs and benefits, including the expressed interests of shareholders in receiving more information and the expressed interests of companies in efficiencies, how should the disclosure requirements be structured? Should some level of investor sophistication be assumed? As Commissioner Stein suggested, should the system be re-imagined? for example, she questioned why the release did not address concepts as basic as the form-based system.
Line items. The discussion indicated that the release addresses six items: core company disclosure, company performance (primarily financial), risk, securities, industry guides and exhibits. The release also considers whether the categories for scaled disclosure are appropriate and whether recent topics of interest and shareholder engagement should be added to the requirements, for example, stock buybacks and sustainability. In addition, the release hints at the prospect of semi-annual, instead of quarterly, reporting.
Presentation and delivery. Here, the release will consider various approaches to presenting and accessing the disclosure and ways to reduce repetition, including cross-references, incorporation by reference, hyperlinks, company websites and standardization versus flexibility. Stein expressed the concern that, in considering whether the quantity of information is excessive, the SEC needs to balance that with concerns about the quality of information. In addition, she observed that a re-imagined delivery system should take into account that different generations may prefer to have their information delivered in different ways, for example, a younger audience may prefer to receive information through tweets.
Among the topics that Stein observed, disapprovingly, were not addressed were abuses in non-GAAP disclosures and disclosure of ESG (environmental, social and governance) measures, which, she contended, some investors believe are potential indicators of better financial performance. With regard to the benefits of reduced disclosure available to very large companies (e.g., WKSIs), Stein reiterated her concern (previously expressed in connection with the grant of waivers) that these benefits not be available for violators.
Commissioner Piwowar emphasized that both the JOBS Act and FAST Act required the SEC to study Reg S-K to simplify reporting and reduce costs to companies, and he expressed disappointment that no such reforms had yet been proposed. In that light, he took issue with any effort to expand the nature of disclosure to cover items that were not strictly “material,” as opposed to merely useful or interesting to some shareholders, or, as he put it, allowing these shareholders to “hijack corporate resources to serve their own agendas.” Presumably, he’s taking direct aim at sustainability and ESG disclosure.