Summary: Directors and officers bear potential liability for their company’s failure to comply with disclosure requirements. These required disclosures have become more and more complex – to the point where they are almost meaningless to potential investors. SEC Chair Mary Jo White recently addressed this topic, perhaps providing a sign of a coming shift by the SEC that may make it easier to raise capital and less onerous to be a public company.
Over the years, required disclosures in private and public offering documents and public company reports have become more complex, detailed and convoluted. The SEC’s major disclosure initiatives of the last few years have involved esoteric topics such as conflict minerals and have resulted in significant increases in required disclosures as well as growth opportunities for consultants in the topic areas. But, have these initiatives benefited shareholders and investors? Or is the deluge of disclosure making it difficult for stakeholders to find information that is truly material?
SEC: Reviewing Disclosure Requirements
SEC Chair Mary Jo White recently indicated that she is thinking about these issues. In an October 15th speech to the National Association of Corporate Directors, she noted that reviewing SEC disclosure requirements, with a view towards modernizing and simplifying them, was an “important priority” for her. She began by acknowledging the importance of corporate directors in shareholder engagement, ensuring that management consider investor needs in connection with the information provided. She said the SEC views the core purpose of disclosure as “provid[ing] investors with the information they need to make informed investment and voting decisions.” SEC Chair White went on to say that, both publically and internally at the SEC, she was asking “whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file”, or whether required disclosures have resulted in “information overload” for investors.
SEC Chair White then enumerated six areas that she thought were most deserving of SEC and public discussions about disclosure:
Whether there are specific disclosure requirements that are “simply not necessary” (such as historical stock trading prices that investors can obtain from other sources) or that investors do not want.
Whether changes to SEC disclosure requirements are the only or best way to ease disclosure overload when other sources, such as legislative initiatives, contribute to the overload.
Whether overlap in disclosure requirements is the cause of repetition in disclosure documents, and whether that repetition is necessarily bad.
Whether the SEC should have line item disclosure requirements or follow a principles-based approach. In the past, a principles-based model, using the concept of materiality, allowed the SEC more flexibility by providing guidance rather than rigid regulations on “hot topics” such as cybersecurity.
Whether investors would benefit from disclosures that are tailored to a company’s industry, such as the oil and gas, mining and bank holding company industry guides. The mining and bank holding company guides were mentioned as candidates for an update.
Whether investors are receiving information they need when they need it, or if there are ways that SEC rules could improve access to company disclosures. She specifically mentioned use of social media to address investors’ expectations about the immediate availability of information and wondered if the existing timeframes in SEC rules and forms continue to be appropriate.
After covering these issues, SEC Chair White then closed her speech by suggesting that different methods of presenting and delivering information should be considered as well. She specifically mentioned a “core document” or “company profile” structure, where companies would file a disclosure document with basic information, and then update that filing with more current information about securities offerings, financial statements, and “significant events”.
First Steps to Major Changes in Required Disclosures
The SEC will soon release a JOBS Act-mandated study of Regulation S-K, the Commission’s fundamental disclosure framework. SEC Chair White said she views this study as only the first step in a review of the SEC’s disclosure regime, which could result in major changes to required disclosures for private and public companies.