Background

The US Securities and Exchange Commission has published a concept release1 examining many aspects of the business and financial disclosures required by Regulation S-K that companies provide in their periodic reports. This concept release is part of the SEC's disclosure effectiveness initiative, the goal of which is to comprehensively review disclosure rules so that SEC staff can recommend improvements that benefit investors and companies that are subject to the SEC's disclosure requirements. The concept release does not examine in detail other disclosure requirements, such as executive compensation and offering-specific registration statement/prospectus disclosure. Although the SEC is also developing specific recommendations as required by the FAST Act2 to address "duplicative, overlapping, outdated and unnecessary" disclosure, such recommendations are still being evaluated and are not reflected in the concept release.

The concept release not only focuses on what information should be disclosed, but on whether information can be presented in a way that is more effective. It explores the extent to which technology may be able to improve disclosure, such as through hyperlinks and navigability tools, and whether such features can be harnessed to streamline disclosure. The concept release also considers whether there are new topics that should be added to disclosure requirements, such as in the sustainability area.

Requests for comments vary from a fundamental approach considering both principles-based rules and quantitative thresholds to questions that are more granular in nature.

The concept release does not contain specific proposals. Rather, it discusses the background and application of business and financial disclosure requirements, describes comments already received as part of the disclosure effectiveness initiative and seeks public comment on 340 different questions, many of which have multiple parts. Comments are due by July 21, 2016.

It will take a long time before any concrete changes to business and financial disclosures in Regulation S-K are proposed, adopted and made effective. Also, not all topics for which comment has been requested will necessarily lead to amended rules. However, in addition to a better understanding of the concerns and attitude of the SEC with respect to current disclosure requirements, the concept release provides companies with an opportunity to suggest areas of disclosure improvement for their disclosure and for their industry. Therefore, companies should consider the questions discussed below and in the concept release with an eye to improving the clarity and understandability of disclosure (including through graphs and charts), eliminating immaterial information and reducing redundant disclosure (for example, through cross-references and hyperlinks). Companies should also review the concept release with a view toward avoiding the types of disclosure deficiencies under existing rules that are discussed in the concept release and below.

Executive Overview

Highlights of the questions raised by the concept release in several key areas are discussed below. This overview is not intended to provide a comprehensive description of the range of matters under consideration. Depending on a company's perspective, there may be other topics of equal or even more importance. However, the following description offers a sampling of some of the more interesting matters raised by the concept release.

Core Business Information. The concept release asks whether the description of the general development of a company's business over the past five years as currently required by Item 101 of Regulation S-K provides useful disclosure that is not available elsewhere in the current filing (such as in management's discussion and analysis ("MD&A") or the notes to the financial statements) or in any prior filing, and whether such disclosure is useful for companies with a reporting history. It also asks whether companies should be required to disclose business strategy. The concept release requests comment on whether a general industry description should be mandatory. Another question asks whether, as a result of the increased prevalence of outsourcing and subcontracting, any additional information about such arrangements should be required. With respect to property disclosure under Item 102 of Regulation S-K, the concept release inquires whether property disclosure should only be mandatory for certain industries, questioning whether the disclosure regarding offices that is typically provided for companies that do not have material physical properties is important to investors.

Company Performance. With respect to selected financial data specified by Item 301 of Regulation S-K, the concept release asks

whether the instructions provide a reasonable balance between specified content and a flexible approach that permits companies to select the data that best indicates their performance. The SEC also asks whether auditor involvement (e.g., audit, review or specified procedures) should be required for selected financial data disclosure, supplementary financial information required by Item 302 of Regulation S-K, and/or the MD&A required by Item 303 of Regulation S-K. The SEC has requested comment on whether the MD&A rules should require an executive level overview and, if so, whether there should be required topics such as the most significant accounting estimates and judgments. The SEC also asks if companies should be required to disclose performance metrics and other key variables that are important to their businesses. The concept release inquires whether additional measures of intra-period liquidity and capital resources should be provided, such as average daily liquidity or average quarterly liquidity, and whether reliance on short-term borrowings is adequately disclosed.

Risk and Risk Management. The concept release asks whether risk factor disclosure mandated by Item 503(c) of Regulation S-K could be improved, for example, by requiring each factor to be accompanied by a specific discussion of how the company is addressing the risk and whether companies should be required to discuss the probability of occurrence and the effect on performance of each risk factor. On the subject of quantitative disclosure and qualitative disclosures about market risk pursuant to Item 305 of Regulation S-K, the concept release asks whether the methods that management uses to manage market risk should be disclosed, rather than prescribed alternatives. The SEC also asks whether Item 305 disclosure is repetitive of US GAAP and Regulation S-X requirements. The concept release seeks input on whether companies should be required to describe their risk management processes and whether companies without formal risk management approaches should be required to describe how risk is monitored and evaluated.

Public Policy and Sustainability. The SEC is expressly seeking feedback on the importance of disclosure of sustainability and public policy matters, which include environmental, social and governance concerns. In particular, the concept release asks whether there are any specific sustainability or public policy issues that are important to informed investment and voting decisions. At the same time, the concept release inquires whether line-item disclosure requirements in these areas would be consistent with the SEC's rulemaking authority and mission and whether such requirements would cause companies to disclose information that is not material to investors.

Exhibits. The concept release explores whether any existing exhibit requirements of Item 601 of Regulation S-K should be modified or eliminated. Noting that schedules and attachments generally must be filed with exhibits, with the exception of schedules and attachments to plans of acquisitions, reorganization, arrangement, liquidation or succession, the SEC asks whether companies should be permitted to omit immaterial schedules and attachments from material contracts and other exhibits. If so, should companies be required to briefly identify the contents of omitted schedules? With respect to amended exhibits, the concept release asks whether companies should be required to file a complete amended and restated agreement for each amendment or whether amendment-only exhibits provide investors with the information they need to evaluate the impact of an amendment on the company. The concept release inquires whether "immaterial in amount or significance" is a helpful standard by which to determine when a contract need not be filed as an exhibit or whether the SEC should adopt qualitative or quantitative thresholds for determining when contracts need to be filed as material exhibits.

Presentation and Delivery of Information. Part of the concept release is devoted to consideration of the optimal manner of delivering information to investors. For example, the concept release examines the use of cross-referencing as a tool to reduce repetitive disclosure and to navigate disclosure. The SEC asks whether cross-references detract from readability, but also asks whether, in light of technological changes that allow hyperlinks, rules limiting cross-referencing should be reconsidered. The concept release also observes that advancements in technology support greater use of incorporation by reference. The concept release both asks whether repeating previously disclosed information hinders an investor's ability to identify changed information and whether there are particular filings or sections of filings that should remain direct sources of information, rather than permitting incorporation by reference. The SEC also inquires whether increased use of hyperlinks and disaggregation of company information into multiple filings would hinder the quality or readability of disclosure.

Company Websites. The concept release examines the use of company websites to provide information to investors, as well as related liability issues. The SEC is seeking comments on whether companies should be able to incorporate information from their websites into their SEC filings and, if so, how companies would be able to identify and limit information on their websites that is "filed" for liability purposes. The SEC also has requested comment on whether incorporation by reference from sources other than a company's filings or websites should be permitted.

Formatting. The concept release explores whether standard layout, format or style requirements would enhance comparability of disclosures across periods and companies. The concept release seeks comments on the advisability of standardized tabular or graphic presentation requirements and required question-and-answer formats for certain disclosures, as well as asking whether "checkthe-box" presentations should be permitted or required for some information. The concept release examines "layered" disclosure that highlights what management believes is the most important information while also providing detailed data and analysis elsewhere, asking whether, other than a summary page, there are approaches to layering that should be considered for business and financial information. The concept release also asks a series of questions related to machine-readable structured disclosures that facilitate analysis, such as XBRL.

Other Topics. As stated at the outset, this Legal Update does not provide an exhaustive summary of all areas on which the SEC requests comments. In addition to those highlighted above, the concept release asks many sets of questions relating to various other subjects of disclosures, such as the securities of reporting companies, the frequency of interim reporting, industry guides and scaled requirements for different types of issuers.

Practical Considerations

Although change to business and financial disclosure rules may not be imminent, the concept release provides the opportunity for public companies to have input on disclosure topics that they have faced in this area on either a regular basis or under particular circumstances. This is the time to become part of the conversation on the future of disclosure. Public companies should review the concept release and consider submitting comments on topics on which they have opinions as to the direction disclosure requirements should take.

The concept release describes areas in which disclosure may be deficient under the existing rules, such as generic risk factors and MD&A discussions of changes in line items that lack a

detailed analysis. The concept release's identification and explanation of those areas of concern provides guidance that companies can use now to improve disclosure under current requirements.

In addition to requesting public comments, the concept release contains extensive discussion on the background and application of business and financial disclosure requirements of Regulation S-K and related issues, such as liability under the Federal securities laws. Therefore, the release itself provides a resource that can be consulted on disclosure interpretations.

The concept release contains a three-page chart summarizing scaled disclosure requirements for emerging growth companies and smaller reporting companies. Persons involved in disclosure for those types of issuers may find that chart to be very helpful.

As noted, the concept release does not address other disclosure requirements, such as executive compensation and governance, or requirements for disclosures for foreign private issuers, business development companies or other categories of registrants. Nevertheless, the SEC has stated that it welcomes comments on disclosure topics not covered by the concept release.