A senior Securities and Exchange Commission (SEC) official said that a key priority for the Division of Corporation Finance (CorpFin) in 2024 is incorporating new rulemakings into its disclosure review program. The commission staff review public company filings to make sure that the information provided is not insufficient or misleading.
This comes as there has been quite a few major rules adopted during Chair Gary Gensler’s tenure in the past couple of years; for example, pay versus performance, clawbacks, cybersecurity, special purpose acquisition companies (SPACs). The official has not mentioned the climate disclosure rule most likely because it is under legal challenge. Moreover, the compliance date is a few years away, though many large companies are beginning to prepare already.
Staff Have to Learn New Disclosure Rules, Too
“Just as you will have to learn new rules when they are issued, we actually have to ensure that our disclosure staff is well trained on those rules as well,” Cicely LaMothe, deputy director for CorpFin’s Disclosure Review Program, told securities lawyers attending the SEC Speaks 2024 conference hosted by the Practising Law Institute in Washington on April 2.
This event features speeches by SEC chair and commissioners and presentations by division staff to provide an update on what is happening at the agency in terms of rulemaking, interpretive guidance, enforcement, and any other initiatives.
LaMothe said that the staff in the review program also consider how the disclosure documents might be impacted by the new rules and whether internal or external guidance needs to be updated.
Moreover, the staff also think about how they schedule reviews to make sure that they are covering appropriate filings. Depending on the rules, the new disclosures could be in annual reports, quarterly reports, proxy statements, Form 8-K, or registration statements.
What Happens After a New Rule Is Adopted
“So, for the disclosure review program, there’s a lot of preparatory work on our end that happens after the adoption of a rule,” LaMothe said.
Because companies will be applying the new rules for the first time, she said they ask how the review program will treat first-time compliance.
“While we do plan to review disclosures made pursuant to new rules, we do try to be reasonable and take a reasonable approach in that first year, understanding that I think many companies are trying to make a good faith effort at compliance,” she explained.
However, LaMothe offered up a couple of tips as companies prepare to implement the disclosure rules for the first time.
First, read the rule releases carefully.
She said companies should include all the required elements in detail as described by the rules in the releases. While it may sound obvious, she said the staff have observed that some companies inadvertently omit certain disclosures. In her view, this could have been avoided had the companies read the rule more carefully.
Second, consider reading staff interpretive guidance such as compliance and disclosure interpretations (C&DIs) that provide clarification when companies apply the rules. And “consider whether and how the guidance may impact your particular facts and circumstances as you’re preparing your disclosures,” she said.
Last, tag the new information using eXtensible Business Reporting Language (XBRL), which is machine-readable.
LaMothe said that XBRL is helpful not only for analysts but also for the staff in analyzing disclosures in a large number of filings.
“They can really provide a high-level insight on how companies are complying with a particular requirement,” she said.
“However, for structured data to really be useful and usable, it is important that the information is consistent and comparable across registrants,” she added. “We have seen instances where it seems like a filing might be flagged as not including a certain disclosure element. But in reality, the disclosure was provided but it was just tagged incorrectly or not tagged at all. So don’t forget about those structured data requirements as you’re filing your disclosure.”
This article originally appeared in the April 3, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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