Are the many disclosure requirements put upon public companies actually benefiting investors?
That's the important question Securities and Exchange Commission Chairman Mary Jo White posed during a speech this week before a National Association of Corporate Directors conference in Maryland. Has disclosure, she asked, reached the point of “information overload?”
That debate will become even more relevant in the weeks ahead as the Commission prepares to release an overview of disclosure requirements mandated by the JOBS Act. Up for consideration is not just what gets reported, but how.
“I am raising the question, here and internally at the SEC, as to whether investors need, and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us,” White said.
White addressed the numerous calls over the years for disclosure reform, most recently the scaling back of disclosure regimes demanded of emerging growth companies under the JOBS Act. The legislation, she noted, requires the SEC to “comprehensively analyze” the rules underpinning its disclosure regime, review disclosure requirements for Regulation S-K non-financial disclosures, consider how to modernize and simplify those requirements, and to reduce the costs and burdens for emerging growth companies. The staff of the Division of Corporation Finance is finalizing this report and expects to make it public in the near future.
The SEC will look at requirements that may no longer reflect the reality of how businesses operate or how investors use information today, White said. For example, there was a time when a prospectus or an annual report was the most reliable and efficient way to obtain historical closing price information. Given the widespread availability of this information on the Internet, is it still necessary to require it?
White also referenced the lengthy “risk factors” disclosure in offering documents and annual reports. In 1995, Congress enacted the Private Securities Litigation Reform Act to address concerns that companies were often subject to securities fraud claims any time they made optimistic statements that did not come true. Its safe harbor provisions encouraged companies to include factors that could cause results to differ from what the company anticipated. Over time, risk factor disclosure became more and more extensive, not necessarily because of SEC requirements (although it is required in the 10-K) but because of legal advice from attorneys assisting with the preparation of filings. “It is fair to ask whether there is more there than is really needed,” White said.
Is there information that appears more than once in a filing, and if so, is that so bad? Litigation against a company is included in annual reports as a section labeled “legal proceedings,” as well as in the risk factors section, in the MD&A, and in the notes to financial statements.
“Accountants say that lawyers insist on the repetition and the lawyers blame the accountants,” White said. “Rather than focus on who may be perpetuating this, we should simply figure out what investors want and whether such repetition is really such a burden for companies. Perhaps more importantly, we need to ask whether we need to harmonize these requirements.”
Up for consideration is when line item disclosures make the most sense for certain topics or, instead, if a principles-based approach works best. White also asked whether investors would benefit from disclosures that are more tailored to specific industries.
White spoke to ways to improve investors' access to company disclosures in an era of instant smartphone access. The current disclosure requirements for public companies require varying timelines for disclosure. The shortest is two business days – for disclosing the transactions and holdings of directors, officers, and beneficial owners. Significant corporate events generally must be disclosed within four business days. Companies have additional time to disclose quarterly and annual reports.
“We need to think about whether the current timeframes in our rules and forms continue to be appropriate,” White said. “In some cases, investors may benefit from receiving the information sooner than currently required. But we must also consider whether shorter timeframes would impose an undue burden on companies.” Another Concern is that more frequent updates could lead to a decrease in the quality of the information.
Improving access could lead to different ways of presenting and delivering information, both through the SEC's EDGAR system and other methods. “We could explore a possible filing and delivery framework based on the nature and frequency of the disclosures, including a ‘core document' or ‘company profile' with information that changes infrequently,” White said. “Companies could then be required to update the core filings with information about securities offerings, financial statements, and significant events.”
“There are many different possibilities,” she said.