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Concept Release for Amending Disclosure Rules Planned for Early 2015

SEC officials hope to publish an early stage rulemaking document, called a concept release, focused on disclosure reforms in early 2015. The concept release is being positioned as part of a broader SEC initiative to overhaul the agency’s disclosure rules. Regulatory officials say they want the information in regulatory filings to be more useful to investors, although many companies hope the effort will scale back the amount of information they have to include in prospectuses and annual and quarterly reports.

Keith Higgins, director of the SEC’s Division of Corporation Finance, told Accounting & Compliance Alert that he hopes to have the agency publish an early stage rulemaking document, called a concept release, in early 2015.

The document is intended to address some of the disclosure requirements in Regulation S-X that deal with business combinations and consolidated reporting by related businesses.

The concept release is being positioned as part of a broader SEC initiative to overhaul the agency’s disclosure rules. Regulatory officials say they want the information in regulatory filings to be more useful to investors, although many companies hope the effort will scale back the amount of information they have to include in prospectuses and annual and quarterly reports.

At this stage, Higgins said his staff hasn’t decided whether the disclosure project will entail one big concept release or a series of documents that solicit public opinions on a range of issues.

Prompted in part by the JOBS Act, SEC Chair Mary Jo White has made the disclosure review a priority for the agency. Companies for years have complained about the mandated disclosures that they say add little value to investors. For their part, some investors worry that the SEC review will result in them having less information.

Corporation Finance Division officials have indicated that the agency is likely to use the project to amend rules that are easier and less contentious to update, such as requirements that are rarely used or outdated.

Speaking at the AICPA’s National Conference on SEC and PCAOB developments in Washington on December 9, 2014, Mark Kronforst, the division’s chief accountant, said the staff has been looking at the Reg S-X requirements for presenting information about an acquired business, and has determined that some of them are excessive and not directly related to the financial condition of the parent company.

“That’s interesting to think about because that is somewhat of a discrete section of our rules, where you think about registrant information intertwined with GAAP,” Kronforst said.

The staff has been studying four Reg S-X requirements, Kronforst said. The provisions include Rule 3-05, which deals with financial statements of an acquired or about-to-be acquired businesses; Rule 3-09, which concerns separate financial reporting by subsidiaries; Rule 3-10, which addresses the financial statements of securities offerings backed by guarantees; and Rule 3-16, which has to do with the financial statements of affiliates whose securities are used as collateral for other securities.

“Other than 3-10, none of these rules have been touched in decades,” Kronforst said.

Kronforst said some of the information required by Rule 3-05 has to do with the pre-acquisition business and is overridden once the acquisition takes place.

The American Bar Association’s (ABA) Business Law Section asked the SEC in a November 14 comment letter to consider increasing the threshold that triggers the three-year reporting requirement for an acquired business. The legal trade group also wants the SEC to consider easing the reporting rules that require audited financial statements of acquired businesses.

The ABA said the three-year requirement is a problem for many companies if the acquired business hasn’t been recently audited, didn’t follow U.S. GAAP in its financial statements, or if its prior auditor is reluctant to be named in a regulatory filing because of the legal liability they may face.

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