In response to the SEC’s request for input on how to improve the effectiveness of public company disclosure, the American Bar Association’s (ABA’s) Business Law Section’s Federal Regulation of Securities and Law and Accounting Committees recently submitted a comment letter to the SEC suggesting, among other things, specific revisions to certain provisions of Regulation S-X and the management discussion and analysis (MD&A) requirements.

The committees noted that, in formulating their suggestions, they “kept in mind that a key objective of the [SEC’s] Disclosure Effectiveness initiative is obtaining better—not necessarily less—disclosure.”

The comment letter contains a number of specific suggestions for the SEC to consider, including the following:

  • Regulation S-X Rule 1-02(w)—replace the significance tests applicable to nonregistrant financial information requirements with revenue and fair value tests.
  • Regulation S-X Rule 3-05—reduce the need for three years of financial statements of an acquired business; eliminate the requirement for separate financial statements for individually significant acquisitions in Securities Act registration statements, provided the registrant makes other disclosures; and, when audited financial statements are not available, simplify the required financial presentation and reduce the “blackout” period for capital-raising activities, provided the acquiring company meets certain conditions.
  • Regulation S-X Rules 3-09 and 4-08(g)—reduce the need for separate financial statements of an equity investee; require disaggregated summarized financial information for all equity investees that are significant at the 10% level; and require aggregated summarized financial information for individually insignificant investees only when they are significant in the aggregate at the 20% level.
  • Regulation S-X Rule 3-10—require financial data for either the nonguarantor group or the guarantor group, rather than condensed consolidating financial information, and expand the circumstances when narrative disclosure about guarantors is enough to include guarantors that are “wholly owned subsidiary” and parent companies that have independent assets and operations.
  • Regulation S-X Rule 3-14—eliminate Regulation S-X Rule 3-14 and further revise Regulation S-X Rule 3-05 to set forth requirements related to acquired real estate operations.
  • Regulation S-X Rule 3-16—permit the presentation of summarized financial information for entities that provide security in registration statements as well as annual financial statements instead of separate financial statements.
  • Regulation S-X Article 11 (and Form 8-K Items 2.01 and 9.01)—permit additional adjustments in pro forma financial information under certain circumstances; permit pro forma financial information for two fiscal years; and conform the Form 8-K requirements for dispositions to those for acquisitions.
  • Regulation S-K Item 303—adopt a requirement for meaningful critical accounting estimate disclosures in the MD&A and eliminate the off-balance sheet and market risk disclosure requirements.

The committees also requested that the SEC codify the interpretations, relief, and waivers that its Staff regularly provides with respect to Regulation S-X to facilitate compliance by registrants and reduce the need for registrants to seek the Staff’s views in such instances.

Finally, the comment letter urges the SEC, in working with the FASB, to coordinate their respective disclosure improvement projects to ensure that any recommendations “for streamlining financial disclosure requirements to eliminate redundancy do not have the unintended effect of unnecessarily increasing liability exposure for registrants.”

The committees note that the letter focusing on Regulation S-X and other financial disclosures is the first in a series of comment letters that the committees expect to submit to the SEC regarding its Disclosure Effectiveness initiative.