In December 2013, the staff of the SEC’s Division of Corporation Finance (Corp Fin) issued its report on the Review of Disclosure Requirements in Regulation S-K (the S-K Study). As we noted in a previous publication, though the S-K Study indicated an intention to implement “disclosure reform,” many aspects of the initiative were uncertain. In a recent speech before the ABA Business Law Section Spring Meeting (a transcript of which can be found here), however, Corp Fin Director Keith Higgins, reported that the SEC Chair, Mary Jo White, has tasked Corp Fin to develop specific recommendations for updating the disclosure requirements, and he also outlined the path forward for the newly minted “disclosure effectiveness” project. In doing so, he called on companies to participate in the process by improving their disclosure now.
With the summer season upon us and many companies taking advantage of this time of year to revisit and update certain of their “core” disclosures, it is worth highlighting the examples Higgins cited as ripe for improvement now, even before the SEC has implemented any changes to the disclosure requirements. In particular, he said public companies should:
- Reduce Repetition. Though repetition may sometimes be worthwhile (and consistency is critical), Higgins recommended considering whether disclosure needed to be repeated in multiple sections of one disclosure document. In an effort to reduce redundancy, more liberal use of cross-referencing may be appropriate.
Commentary: Securities law practitioners often take the view that MD&A, the purpose of which is to present to investors information about a company’s past performance, financial position and future prospects through the eyes of management, should “stand on its own” while it provides that perspective. Accordingly, though increased cross-referencing may be appropriate, many will resist excluding disclosure from the MD&A section in favor of referring to disclosure elsewhere. In addition, when deciding whether to omit disclosure and include a cross-reference, consider whether doing so would lead to potential confusion by eliminating needed context.
- Focus on the Company’s Disclosure. Higgins recommended that companies scale back the length and extent of disclosure by resisting the urge to include disclosure primarily because other companies disclose it or because a subject is considered a “hot button” topic for SEC staff comment letters, and to instead focus on the relevance of that issue to the company.
Commentary: In raising this topic, Higgins specifically highlighted what he characterized as overly lengthy risk factor disclosure. Given the importance of risk factor disclosure to secure the safe harbor under the Private Securities Litigation Reform Act of 1995 and the litigious world in which we live, we do not recommend drastic reductions to risk factor disclosure absent more formal SEC guidance. Failure to include references to risks that are identified by peers or competitors may be inviting trouble, even if one size does not fit all. Nevertheless, many companies could benefit by making their risk factor disclosure less generic and more tailored.
- Eliminate Outdated Information. Companies should regularly evaluate their disclosures to determine whether they are material and, if not material and not required, eliminate that disclosure. Higgins underlined that disclosure initially included in reports in response to SEC staff comments is not sacred; materiality and specific disclosure requirements should still guide the disclosure decision. In remarks before the Annual Conference of the Society of Corporate Secretaries and Governance Professionals on June 27, 2014, Higgins reiterated that companies should not be reluctant to change prior disclosure for fear of receiving SEC comments, noting that reviewers are engaged in the disclosure effectiveness project and will be open to a constructive dialogue with companies about their disclosures.
Commentary: Higgins’ remarks are a valuable reminder to companies to remember that, while updating existing disclosure for recent developments, they should focus not only on adding new information but also on eliminating what no longer belongs.
Though Higgins’ recommendations are focused on reducing disclosure, we should not assume that the disclosure effectiveness project will only result in removing disclosure requirements or in suggesting ways to make disclosure documents shorter. His current recommendations are really intended to reduce redundancy and eliminate immaterial information rather than to reduce the amount of material information disclosed. A goal of the disclosure effectiveness project is to increase the transparency of information, and Higgins has said that Corp Fin’s recommendations may include both removing some disclosure requirements and adding new ones.
The disclosure effectiveness project also includes a public outreach component. The SEC has launched a spotlight page on sec.gov where it invites market participants to publicly share their views on these topics.