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Disclosure Reforms May Allow for More Discretion in Company Filings

The SEC is reviewing its disclosure rules, and agency officials want the reform effort to give companies more latitude to use judgment in determining the information that’s important to investors. Regulators want to reduce the overlapping requirements in SEC rules and U.S. GAAP. They’re also considering an expansion of the number of companies that qualify for small-company regulatory exemptions.

The SEC’s review of its disclosure rules may permit companies to use more flexibility and judgment through what regulators call a principles-based approach to regulation.

Keith Higgins, the director of the agency’s Division of Corporation Finance, said during an October 3, 2014, speech in Cleveland that the SEC’s review of its disclosure rules will seek a means to update the rules and eliminate duplicative requirements. At least at the outset, the review may focus on the more principles-based approach and downplay some specific rules.

“This approach may provide a company with more flexibility to provide disclosures that it believes are material to investors,” Higgins said.

Higgins said the SEC wants to reduce the overlapping requirements in Regulation S-K and U.S. GAAP. The revamp is also likely to involve some reworking of the SEC’s industry guides, which are slated for updates to catch up with recent developments in business. The revised guides could be added to Reg S-K.

The SEC’s Division of Economic and Risk Analysis is also considering an expansion of the number of companies that qualify for exemptions granted to nonaccelerated filers, which are companies that have stock market values below $75 million. Higgins said the threshold could be raised to $250 million in market value or a combination of $100 million in sales and a market value of $700 million.

In the past, some investors and regulators have criticized plans to increase the number of companies that qualify for regulatory exemptions because it could increase the risk of fraud. Small companies tend to invest less than large companies in their financial reporting systems and tend to have accounting problems more frequently.

The SEC wants to make sure its rule changes make it easier for investors to get information and help companies lesson the duplication of regulatory information. Higgins also said the SEC doesn’t want its review to restrict the amount or quality of the information investors receive.

“Although we believe that these efforts can reduce the costs and burdens on companies, updating the requirements may very well result in additional disclosures,” he said.

The SEC’s review of its disclosure rules coincides with similar efforts at the FASB and IASB. SEC and FASB officials meet regularly to discuss a range of issues, and Higgins said the SEC and FASB are coordinating their efforts on disclosure reforms.

The review of disclosure rules dates back several years, and the current version largely grew out of a call by the FASB’s Investor Advisory Committee to cut back on excessive disclosures and stress only the information that’s important to investors.