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Disclosure Reform Initiative May Start with Simple, Uncontroversial Changes

The SEC is working on a long-term project to simplify its disclosure rules and make the information companies include in their filings more effective.The staff in the SEC’s Division of Corporation of Finance is thinking of tackling easier items that can be quickly acted on and may focus on information that most investors don’t want or need from company filings or can get elsewhere.

Keith Higgins, director of the SEC’s Division of Corporation Finance, said the agency’s staff is considering making smaller, easier changes to its disclosure rules first before tackling more complicated items.

The initiative is part of the agency’s effort to follow through on a plan Congress initiated in the JOBS Act to clean up its disclosure requirements.The JOBS Act instructed the SEC to publish a report reviewing its disclosure requirements in Regulation S-K.The December 2013Report on Review of Disclosure Requirements in Regulation S-K,contained some preliminary conclusions but few specific recommendations for revising the rules.

During an event hosted by the U.S. Chamber of Commerce in Washington on July 29, 2014, Higgins said the staff is trying to produce ideas that are “so clear” that the staff can recommend speedy action.The staff hasn’t focused on any particular recommendation, but “that’s where we are headed,” Higgins said.

“Where investors get this information better in other places, it probably doesn’t need to be” in filings, he said.

Higgins didn’t spell out what the items will be, but during a July 25 congressional hearing, he told lawmakers that investors don’t go to a company’s filings to get historical stock prices.Instead they use online sources like Yahoo Finance.

“We hope there will be a consensus on smaller ticket items,” he said. “We can move quickly to clear out the clutter, the stuff that prevents companies from focusing on” what’s material to investors.

The Chamber issued a report with several short-term recommendations for the SEC, such as eliminating requirements that a company disclose the same or very similar information in multiple locations.For example, the Chamber cited the requirement to disclose in a company’s 10-K the “general development” of a business, including the nature and results of any bankruptcy, acquisition, or other significant development in the lifecycle of a business.

The requirement’s origins date back several decades, and investors find information about a business’s development useful.However, information about material acquisitions, dispositions, or bankruptcies are disclosed in an 8-K or other filings, given its importance to the company’s business.Redundant disclosure in subsequent reports shouldn’t be required, the Chamber said.

Higgins told the conference that the disclosure reform project will do more than review the SEC’s disclosure rules and filing requirements.

He said SEC officials are evaluating how staff members send comment letters to companies when they believe some information in a filing is inadequate or not clearly disclosed.He said he recognizes even more now, serving as the head of the division, that “comments have effects.”

“We are trying to let people know, just because we raise comments, we don’t want the result to be where you just put a disclosure in the filing so you can get rid of the comment,” Higgins said, emphasizing that the lengthier disclosure is not necessarily the best result.

“Our comment process is meant to enhance disclosure and to provide material information for investors,” he said, explaining that the staff’s initial comments are sent because the staff thought something wasn’t clear and needed to know more about it. “But it doesn’t mean we reached a conclusion that a particular item has to be disclosed.”

In some cases, however, companies may be at fault for including information in a filing that’s unnecessary.For example, some companies believe that they need to leave a disclosure in every quarterly or annual filing after receiving one comment letter out of fear that they may get another comment.

“We want to disabuse you of that notion,” Higgins said. “If the comment no longer makes any sense, you don’t have to provide it.Our folks are on board with that.”

Some of the bigger, complex issues that will take years to reform include the use of technology, Higgins said.The EDGAR filing system uses a reverse chronological order, but “that’s not the way people get information.”

He said the SEC could spark a discussion about the 10-K and 10-Q filings and ask if they’re outmoded.

SEC Chair Mary Jo White made the disclosure project a priority for the agency, and the Division of Corporation Finance has been getting information about how the disclosure rules can be improved.Companies for years have complained that disclosure requirements have become longer and more burdensome while providing little commensurate value, and they are eager for the SEC to cut back some of the rules that contribute to what they classify as disclosure overload.

However, investors have said that they want information that’s useful for investment decisions, and they don’t want to wind up with less information in company filings than they receive today.