A few days ago, Corp Fin director, Keith Higgins, gave a speech, “Shaping Company Disclosure for the 21st Century” before the George A. Leet Business Law Symposium at Case Western Reserve University School of Law, in which he discussed some of the SEC’s considerations in its “Disclosure Effectiveness Initiative.”
Diverse Investor Audience. First, he noted the wide divergence in levels of investor sophistication that characterize 21st century investors — “from a retail investor with a 401(k) plan to a Ph.D. portfolio manager at a mutual fund with billions of dollars of assets under management” — highlighting the importance of striking an appropriate balance regarding the nature and extent of information that companies should be required to provide to these varied audiences.
Scaled Disclosure Revisited. The nature and extent of required information will also vary depending on the size of the company and the nature of its business. According to Higgins, the SEC is considering whether to revise the scaled disclosure thresholds to allow larger companies to take advantage of scaled disclosure requirements available to smaller reporting companies (currently, companies with less than $75 million in public float).
Specialized Guidance. Another area the staff is looking at is the changing nature of businesses. At one time, the SEC had developed industry guides for companies in specialized industries, such as oil and gas, mining and bank holding companies. Higgins advocates that those guides to be updated, either as guides or as codifications within Reg S-K. But more importantly, he asks whether the SEC should create specialized guides directed at more modern industries, such as biotechnology, telecommunications and social media?
Redundancy. Reducing redundancy is another common theme that Higgins reiterates here, notably in connection with overlapping disclosure requirements in Reg S-K and GAAP. In particular, disclosures about legal proceedings, off-balance sheet arrangements, market risk sensitive derivative instruments and share repurchases are required both by Reg S-K and by FASB. The SEC staff is coordinating with FASB representatives in an effort to eliminate unnecessary repetition.
Company Innovation. Higgins also encourages companies to innovate on their own to improve presentation, reduce duplication and eliminate stale information. The staff will discuss prospective changes, although it won’t pre-clear specific disclosure.
Principles-based Disclosure. The Initiative is working to strike the right balance between specific line-item requirements and principles-based disclosure. Principles-based disclosure offers greater flexibility, but runs the risk of being too open–ended.
MD&A. The Initiative is looking at the possibility of including some changes to MD&A, including changes in the comparative periods required to be presented. Could the third year of financial information be eliminated from Form 10-K or does it add valuable trend information?
Company File. Higgins describes the “company file” approach as “an alternative that is gaining traction.” The idea was first floated by Mary Jo White in 2013 as an approach that would include a “core document” or “company profile”’ with information that changes infrequently and is then updated regularly by other filings. (See this news brief.) As described by Higgins, the concept has evolved into a system in which, instead of filing a 10-K, companies would be required to update information: “The company page on sec.gov might display tabs such as ‘Business information,’ ‘Financial information,’ ‘Governance information,’ ‘Executive Compensation,’ and ‘Exhibits’ instead of a chronological list of filings. And, instead of the response to Item 101 of Regulation S-K being included in a Form 10-K, it would appear as a block of structured data under the ‘Business information’ tab on sec.gov.” While this type of system seems to have gained a head of steam, Higgins observes that that there are serious countervailing considerations, particularly, “the disciplined process that has developed around the periodic reporting system — such as audits, officer certifications and disclosure controls and procedures. These processes have substantive importance and contribute to the reliability of company disclosures. We also need to recognize that there may be instances where it may be desirable for investors to have all of the relevant information available in one place at the same time.”