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Former Regulators Say Companies Share Some Blame for Lengthy Disclosures

The SEC is working on a project to simplify its disclosure rules and make the information companies include in their filings more effective. Part of the effort may result in cutting back some requirements to address companies’ complaints that many disclosures are redundant and unnecessary. However, two former SEC commissioners say companies often add to their disclosures to avoid lawsuits.

The SEC staff has been evaluating its rules and company filings as part of the agency’s initiative to make corporate disclosure more effective.

The agency wants to eliminate some redundant requirements without getting rid of information investors say is important.

Companies have complained for years that requirements have become longer and more burdensome while providing little value, and they want the SEC to cut back some of the rules that contribute to what they call disclosure overload. However, at least two former SEC commissioners said part of the problem may not lie in the SEC’s regulations but in the nation’s litigious environment.

“Disclosures have become more of a litigation document than an education document for investors,” said Cynthia Glassman, an SEC commissioner from 2002-2006, during a conference hosted by the U.S. Chamber of Commerce in Washington on July 29, 2014. “One of the issues that came up at the commission when I was there was with more electronic disclosure, the concern was that if you had an executive summary and linked back to more information… it could create a lawsuit because it wasn’t complete even though there was more information that you can find.”

Glassman, a senior research scholar at the George Washington University School of Business, said companies “pretty much cover the gamut of anything” that could be considered a risk. The downside is that this approach leads to long disclosures that make it hard for investors to discern the real risks.

“There is so much information that there is no information,” she said.

Roel Campos, an SEC commissioner from 2002-2007, agreed that a lot of the lengthening of the disclosures in regulatory filings has to do with companies’ fears about their legal liabilities. Attorneys advise corporate clients to take as few risks as possible because that is their role.

“In this realm, it means more disclosure, and having more items because that will end up being more protection,” said Campos, who is a partner with the law firm Locke Lord LLP in Washington.

Glassman said lawyers and auditors in their efforts to protect clients may add to the length of the disclosures.

Sometimes attorneys will advise all their clients to provide more information on a particular topic after one client has been asked about the matter in a comment letter from the SEC staff.

“It moves across companies even though it was very specific to the first one,” Glassman said. “And then it stays there. The companies don’t stop. They just do it forever, and then the disclosure gets longer and longer. Part of it is just the advisers are trying to help, but it does add to a mythology that the SEC wants this information, which they don’t necessarily want for every company.”

The SEC’s disclosure reform initiative is part of an effort to follow through on a plan Congress included 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 2013 Report on Review of Disclosure Requirements in Regulation S-K, contained some preliminary conclusions but few specific recommendations for revising the rules.

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.