SEC staff reports to Congress on Review of Reg S-K Disclosure Requirements

News Brief

By Cydney Posner

I know you've been looking for some engrossing but fun holiday reading, and it's finally here: the SEC Staff's Report To Congress on Review of Disclosure Requirements in Regulation S-K, as mandated by the JOBS act.  Take a copy home tonight!

According to the press release,, the report is part of the SEC's "ongoing efforts to modernize and simplify disclosure requirements and reduce compliance costs for emerging growth companies." Even though the legislative mandate was to focus on changes that would be applicable to EGCs, the staff concluded that a full review of Reg S-K would be appropriate since there may be modifications that would be appropriate for all issuers. The recommendation of the report (which itself summarizes a staff review) is first to develop a plan to then perform another systematic review of the disclosure requirements on a comprehensive basis. My prediction: some time in the not-too-distant future, we will end up with a "core" disclosure document or "company profile" that remains relatively static, but is updated in periodic and other reports. This type of format is introduced in the report as an example of possible presentation changes, and you may recall that SEC Chair Mary Jo White has suggested that framework in a prior speech.

In the press release, Chair White said that she has "directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings. We will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented. The ultimate objective is for the Commission to improve the disclosure regime for both companies and investors." She left it to Keith Higgins, Director of Corp Fin, to charge companies with their responsibilities. According to Director Higgins, while updating the rules is an important first step, "companies should examine how they can improve the quality and effectiveness of their disclosures and how our rules can be improved to facilitate clear and effective communications to investors. Better disclosure benefits everyone in the marketplace, and we plan to work with companies and investors to achieve this common goal." The SEC's Office of the Chief Accountant will coordinate with the FASB to identify ways to improve disclosures in financial statements and minimize duplication.

The report first presents an overview of the regulatory history of the integrated disclosure system and previous SEC initiatives to modernize disclosure requirements. The report also walks through the various disclosure requirements of Reg S-K, the Industry Guides and related rules and forms. The report concludes with a discussion of staff recommendations for the SEC's consideration.

Most of the changes in the disclosure rules over time have sought to address specific gaps in disclosure or mandated policy. However, since the SEC's last comprehensive review in 1996, there have been many technological advances that that have affected communications, as well as a number of financial crises and scandals that have led to legislation and rulemaking. In light of these changes and events, the staff believes that the SEC's "disclosure requirements should be reevaluated in order to ensure that existing security holders, potential investors and the marketplace are provided with meaningful and, to the extent possible in the Commission's rules, non-duplicative information upon which to base investment and voting decisions, that the information required to be disclosed by reporting companies continues to be material and that the disclosure requirements are flexible enough to adapt to dynamic circumstances."

The staff believes that gathering more information from market participants is necessary before specific recommendations can be formulated. Further economic analysis is also warranted and should be conducted with the following principles in mind:

  • "Improving and maintaining the informativeness of disclosure to existing security holders, potential investors and the marketplace, which is particularly relevant to emerging growth companies that need capital to invest in their businesses;
  • The historical objectives of a given rule should be considered, including a consideration of any specific disclosure gaps, mandated policy objectives or other conditions sought to be addressed by a given requirement's adoption, whether such conditions are still applicable, and, if not, whether the potential for a return of those conditions poses risks to potential scaling or elimination of the requirement;
  • Whether the information provided by a given rule is available to existing security holders, potential investors and the marketplace on a non-discriminatory basis from reliable sources and, if so, any costs or benefits to such persons from obtaining such information from sources other than the issuer, including the ability of investors to seek appropriate redress;
  • The extent to which a given disclosure requirement entails high administrative and compliance costs, especially for emerging growth companies;
  • The extent to which disclosure of a company's proprietary information may have competitive or other economic costs, which may be particularly relevant to emerging growth companies;
  • Maintenance of the Commission's ability to conduct an effective enforcement program and deter fraud, especially regarding disclosures shown to be instrumental in detection and deterrence; and
  • The importance of maintaining investor confidence in the reliability of public company information, in order to, among other things, encourage capital formation."

The staff recommends that the systematic review also cover disclosure requirements developed through various staff interpretations and guidance, as well as factors external to the SEC's rules that may have contributed to the length and complexity of filings, such as enforcement actions and judicial opinions. After weighing whether to a recommend a quicker, in-depth, topic-by-topic targeted review or a comprehensive approach that involved reviewing and updating requirements on a wholesale basis as well as presentation and delivery issues, the staff opted for the comprehensive approach because it would allow the staff to address the interplay among all sources of disclosure requirements and facilitate streamlining, even though it would certainly be a longer-term project involving significant staff resources across the SEC.

The following are among the staff's suggestions for specific areas of further study:

Reg S-K

The staff recommends further review and information gathering to identify ways to modernize and simplify Reg S-K to reduce costs and burdens on companies while still providing material information, in particular, keeping in mind the following four issues:

  • Emphasis on a principles-based approach to address the accumulation of layers of static requirements, while preserving the benefits of a rules-based system that provides "consistency, completeness and comparability." (Think MD&A.)
  • Evaluation of the appropriateness of current scaled disclosure requirements and whether further scaling would be appropriate for EGCs or others (e.g., adding a general instruction that would permit smaller reporting companies to omit line-item disclosure where not material from the perspective of a reasonable investor).
  • Evaluation of methods of information delivery and presentation, both through the EDGAR system and other means, including, for example, exploring the possibility of a "filing and delivery framework based on the nature and frequency of the disclosures, including a ‘core' disclosure or ‘company profile' filing with information that changes infrequently, periodic and current disclosure filings with information that changes from period to period, and transactional filings that have information relating to specific offerings or shareholder solicitations."
  • Consideration of ways to improve the readability and navigability of disclosure documents and discourage repetition (e.g., through hyperlinks) and disclosure of immaterial information (e.g., through the use of quantitative thresholds – as in Item 103 (Legal Proceedings), Item 404 (Certain Transactions) and Item 509 (Interests of Named Experts and Counsel) -- and other standards of materiality incorporated into the rules) or information that is already readily accessible to market participants, such as historical stock price information.

With regard to specific areas of Reg S-K that should be reviewed, the staff has identified the following areas:

Risk-related disclosures. The staff should consider improvements (e.g., whether to consolidate risk factors, legal proceedings and other quantitative and qualitative information about risk and risk management), and whether different risk-related disclosures should be required. Would anyone disagree that Item 305 could certainly stand some improvement?

Business and operations. The requirements for description of business and description of properties should be reviewed for continuing relevance in light of changes that have occurred in the way that businesses operate (i.e., the growth of businesses that do not require physical locations to operate or can easily substitute physical locations without any material impact on their operations). Where properties are material, disclosure could focus on material facts about the property. In addition, the effects of globalization and technology on business operations could require different types of disclosures, e.g., where a business relies heavily on intellectual property owned by a third party or relies on service agreements with third parties to perform necessary business functions or where businesses are dependent on non-U.S. operations. Consideration could be given to continuing relevance, presentation and delivery, as well as the potential for calibrating the information for different types of investors.

Corporate governance disclosure requirements. Materiality and effective access to material information that avoids boilerplate should be considered. Alternative formats, such as including the information in a filing that is only updated when changes occur, should also be evaluated.

Executive compensation requirements. This area should be evaluated in light of common complaints regarding the lengthy, technical disclosure as well as the potential for further scaling.

Offering-related requirements. Potential areas for review, especially in light of significantly changes in offerings and delivery methods, include presentation of information, required legends and undertakings and requirements pertaining to underwriting arrangements and compensation. Consideration could also be given to principles-based disclosure for use of proceeds, securities of the registrant and offering expenses, or combining information about dilution, shares eligible for future sale and securities authorized for issuance under equity plans and under outstanding securities and agreements.

Exhibits. The list of requirements should be reviewed for relevance, and the manner in which exhibits are made publicly available on the SEC's website should be examined (as locating some exhibits can be difficult).

Use of Item 10 as a catch-all. Consider if Item 10 is the right place for the SEC's policy on the use of securities ratings in filings, the conditions for the use of non-GAAP financial measures and the scaled disclosure requirements for smaller reporting companies.

Regulation M-A. Consider whether Reg M-A should be part of the review.

Emerging Growth Companies.

Consider whether companies other than EGCs should be eligible for potential further scaling of disclosure requirements. Consider the various threshold requirements, taking into account the five economic principles discussed above, for smaller reporting companies, EGCs, accelerated filers and large accelerated filers. Consider also "how companies should migrate to a standard disclosure regime as they mature and the extent to which disclosure of previously undisclosed information should later be required."

Industry Guides.

Consider whether the Industry Guides still elicit useful information and conform to industry practice and trends and whether any of the requirements should be codified in Reg S-K, whether information is duplicative with accounting standards and whether scaled requirements or transition periods should be available for certain classes of registrants.

Financial Reporting and Disclosure Requirements.

A comprehensive review of Reg S-X may be warranted. According to the report, the last review of Reg S-X was conducted in connection with implementation of the integrated disclosure system. Some requirements may now be redundant with later-adopted financial statement disclosure requirements. In addition, the review could examine the Reg S-K requirements for annual and quarterly selected financial data and the ratio of earnings to fixed charges.

Disclosure Requirements Contained in Rules and Forms.

The disclosure requirements that are contained in rules and forms, such as Form 10-Q and Form 8-K, should also be reviewed, both substantively as well as in connection with the review of presentation and delivery issues. <br> <br>Have a great holiday and happy new year!!