On April 13, 2016, the Securities and Exchange Commission issued a concept release seeking input from the public on a broad range of questions about the disclosure requirements for periodic reports, with a view toward modernizing not only the content of disclosure but the way in which disclosure is presented and delivered. The concept release represents a significant step in advancing the SEC’s disclosure effectiveness initiative since the SEC staff laid out its preliminary conclusions and recommendations for disclosure reform in its December 2013 report to Congress mandated by the Jumpstart Our Business Startups (JOBS) Act.
The concept release re-examines some of the most basic foundations of the U.S. disclosure regime and raises fundamental questions about whether the materiality standard is still the best approach to crafting disclosure and whether public companies should write their disclosure for sophisticated, institutional investors rather than for the individual investor. All of the questions posed by the SEC consider the need to balance investor protection with the cost to public companies of preparing disclosure.
The concept release seeks public comment on 340 questions organized around three broad topics:
- The disclosure framework of Regulation S-K
- The specific business and financial requirements of Regulation S-K
- The presentation and delivery of disclosure in periodic reports
Re-examining the Disclosure Framework The concept release raises questions on core issues that are likely to lay the groundwork for overall disclosure reform. One of the most fundamental questions posed by the SEC is whether the SEC should take a principles-based or prescriptive approach to revising disclosure rules and how to balance the two approaches.
The concept release notes that while prescriptive rules have the advantage of applying bright-line thresholds for disclosure across all registrants which provides consistency and comparability, they may result in disclosure of immaterial information. Principles-based rules that allow companies more flexibility in determining what disclosure is material to investors are more easily tailored to a company’s specific circumstances and more adaptable to future developments, but disclosure across companies may not be consistent.
The concept release also re-examines the audience for disclosure in the 21st century and raises questions about whether companies should be permitted to assume that investors have some level of sophistication in an effort to reduce disclosure overload. The SEC is seeking comment on whether there are ways to provide disclosure to different audiences based on their needs by taking a layered approach, for example, signaling the delicate balance that any rule changes will need to strike in order to fulfill the SEC’s mission of investor protection.
Dissecting the Line Item Disclosure Requirements of Regulation S-K The concept release reviews the current line item requirements of Regulation S-K, which provides the requirements for public company disclosure, that relate primarily to core company business information, company performance, financial information (other than financial statements) and future prospects and risk and risk management in significant detail and asks what should be kept, modified, eliminated or added to the rules for each topic.1 The concept release does not address executive compensation or corporate governance disclosure in proxy statements, but SEC Chair Mary Jo White made clear in her remarks that these topics will be considered in the future as part of the staff’s ongoing review of disclosure effectiveness.
The SEC is also looking for feedback on whether disclosure of public policy and sustainability matters (environmental, social or governance concerns) are important to investors and whether they would elicit material information. The concept release also addresses in detail the periodic report exhibit filing requirements of Regulation S-K and whether these requirements continue to provide investors with information important to making informed investing and voting decisions.
Scaled Disclosure Requirements The concept release explores whether the SEC should extend scaled disclosure accommodations to a greater number of SEC registrants in an effort to reduce the burden and costs of disclosure compliance on smaller companies. The SEC is also looking at the types of disclosures that are currently scaled down for smaller companies and is considering whether they are appropriate in light of investor protection and whether other disclosure requirements can be scaled down for these categories of companies.
Frequency of Interim Reporting The SEC’s concept release raises the question of whether quarterly reporting on Form 10-Q, which has been mandated for all public companies since 1970, should be discontinued. Alternatively, the concept release seeks input on whether quarterly reporting should be eliminated only for smaller reporting companies and replaced with semi-annual reports and even raises the question of whether certain registrants should be required to file monthly reports.
Presentation and Delivery of Information The concept release also seeks public input on how the rules can facilitate the readability and navigability of disclosure documents. In particular, the SEC is focused on how the evolution of the Internet and digital technology has changed the way in which investors consume information and how the disclosure requirements can more readily adapt by using tools like cross-referencing, incorporation by reference, hyperlinks and company websites.
Layered disclosure, or the use of summaries, is also addressed in the concept release. Questions on structured disclosures – tagging data in ways similar to XBRL – are raised in the release, recognizing the important role that advances in technology and the demand for sophisticated data analysis by institutional investors play in disclosure effectiveness.
Next Steps The concept release is a continuation of a dialogue that the SEC’s staff has been having (and seeking public comment on) for several years, but it is an important and concrete step forward in that the SEC has now formally begun a rulemaking process. The issues raised by the SEC in this concept release have the potential to dramatically change the way in which companies prepare and deliver disclosure to investors, the burdens of preparing that disclosure and the effectiveness of disclosure in the hands of investors.
The concept release is a meaningful opportunity for all constituencies that produce and consume corporate disclosure documents to provide input to shape the content and delivery of disclosure in to the 21st century. The comment period will run for 90 days after the concept release is published in the Federal Register, which should occur within a week.