It's time for the '21st Century Disclosure' Initiative

By Cydney Posner

And we thought that adoption of Securities Offering Reform in 2005 was a big deal (or was that ordeal?). That rulemaking under Chairman William Donaldson changed only the registration, communications and offering processes under the Securities Act. Not to be outdone, SEC Chairman Cox has just announced the "21st Century Disclosure" Initiative, "an ambitious effort to examine fundamental questions about the way the SEC acquires information from public companies, mutual funds, brokers, and other regulated entities, and the way it makes that information available to investors and the markets." In a speech this week, Cox credited Alan Beller, the former Director of Corp Fin, with originating the idea. Cox suggests that "the overarching purpose of this conceptual experiment will be to maximize the ability of investors to use disclosure information more quickly, in a greater variety of ways, and at the level of detail they desire." The study will be led by Dr. William D. Lutz of Rutgers University, who has published numerous books and articles on the importance of disclosure presented in plain language and also prepared the SEC's Plain English Handbook. (And who could forget that worthy effort? When SEC reviewers sought to extinguish from every prospectus every last trace of the word "such," including as used in the phrase "such as"?)

The SEC's expectation is that the internal study will involve a "fundamental rethinking of financial disclosure" and will be "aimed at identifying the objectives of the ideal disclosure system at the architectural level." Apparently, that's not just hyperbole. In his speech, Cox said that "the project won't proceed from the premises of the current reporting system. It will start from scratch, from the ground up, freed from any conventions. It will begin with the most basic purposes of the reporting and disclosure system — the needs of investors, directors, and other users of disclosure — viewed in the context not of 1934, but of today's markets. Based on this assessment, the project will take a critical look at the current approach and then conceive a blueprint for the ideal disclosure system of the future." According to the SEC, the study will include a review of all existing SEC forms and reporting requirements, as well as the manner in which information is provided to the SEC, with a special focus on needless redundancy. The study will also consider alternative strategic approaches to acquiring and publishing disclosure information, ways that regulatory requirements for the collection of information might be tailored to achieve the best real-time distribution of financial and narrative disclosure to investors, and how best to integrate public disclosure with the SEC's proposed new post-EDGAR architecture for investor search, assembly and comparison of data.

The blueprint for this complete overhaul of the SEC's current forms-based system is expected to be completed by the end of this year, to be followed by establishment of an advisory committee in 2009 to review the blueprint and to continue the discussion in a public setting with input from various stakeholders. Recommendations to the SEC for rulemaking would follow as appropriate.