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Review of Disclosure Rules Gains Momentum

October 16, 2013

The SEC is planning to hold a public discussion on its disclosure rules to see if the rules are producing useful information for investors.At the same time, the agency is reviewing Regulation S-K in response to a request from Congress.

The SEC is ready to move ahead with a public discussion on making disclosures more relevant to investors and less problematic for public companies.

Speaking at an October 15, 2013, conference hosted by the National Association of Corporate Directors in National Harbor, MD, SEC Chairman Mary Jo White said the agency wants to do a comprehensive examination of disclosures.

As a first step, a study of Regulation S-K mandated by the JOBS Act will be made public “very soon,” White said.

The review is getting underway months after the initial plan had called for the event.

SEC Chief Accountant Paul Beswick said in December 2012 that agency officials wanted to hold a public forum in early spring 2013 to take a broad look at financial reporting and disclosure.The forum was slated to include representatives from the PCAOB and FASB, which has a separate project to examine a range of disclosure issues.

FASB officials have regularly said they want to work closely with the SEC as they proceed with their effort.

Auditors, financial executives, lawyers, and investors were also expected to take part.

White called the disclosure initiative a “high priority but didn’t say whether the review will produce new rules.

The SEC wants to find out whether some specific disclosure requirements are simply not necessary for investors or whether they aren’t what investors want.

“After all, the fundamental purpose of disclosure is to provide a reasonable investor with the information that he or she would need to make an informed investment or voting decision,” White said. “We need to consider whether the disclosure regime as a whole is generating the information that a reasonable investor would need to make decisions.”

Some requirements that may have been appropriate in the past may no longer reflect how businesses operate now or how investors use information.

For example, White said there was a time when a prospectus or an annual report was the most reliable and efficient way for an investor to obtain historical closing price information about a company’s common stock.But since the 1990s, real time stock quotes have been widely available on the Internet.

“We need to ask whether it is still necessary to require disclosure of historical share closing prices,” she said.

The critics of the disclosure rules issued by the SEC and FASB take issue with more than just requirements that they say are outdated.Other types information may also be contributing to the ever-growing amount of disclosure.For example, disclosure of executive compensation in some cases totals 40 pages.

To some extent, the volume of information is the result of new mandates.But for some companies, the level of detail stems from an effort to provide investors with the rationale for the compensation packages.

In discussing the plans for the disclosure roundtable earlier this year, Beswick said there is a concern that information that is traditionally in the management’s discussion and analysis section of a regulatory filing is being duplicated in the financial statement footnotes.His staff was preparing a paper about how to draw a dividing line between the requirements for the MD&A and the footnote disclosures.

In the months since then, the project was combined with the Division of Corporation Finance’s study of Reg S-K, which forms the underpinnings of the SEC’s disclosure regime.

Separately, when asked about whether the SEC will write a rule dealing with cybersecurity disclosures, White said, “I don’t see a need for a rule; we are pleased with the guidance and what has flowed from the guidance in the first year.”

She was making a reference to Disclosure Guidance: Topic No. 2 that the SEC’s staff issued in October 2011 to explain when companies should disclose computer problems and risks.The staff in the Division of Corporation Finance has said there has been an improvement in the disclosures.

“We are still undertaking that review, and we will be monitoring very closely to see whether we think rulemaking is necessary or desirable,” White said.

The SEC’s review of disclosures concerning computer security comes as attacks on corporate and government computer networks continue to make news.Shareholders and regulators have pressured companies to be more forthcoming about the resilience of their information systems.