As mandated by the JOBS Act, the SEC has been reassessing its disclosure rules in an attempt to modernize and overhaul Regulation S-K. In April, the SEC took the major step of publishing a concept release seeking the public’s view on potential changes it is considering. The concept release focuses on areas that are generally consistent with the SEC’s prior comments and reports (see this Doug’s Note), and validates that this initiative remains underway. Ultimately, the SEC aims to eliminate or amend any Reg. S-K disclosure requirements that are duplicative, overlapping, outdated or superseded.
The concept release seeks comments from both investors and companies on:
- how certain disclosures are used in making investment and voting decisions and whether more, less or different information is needed;
- how it could revise its current requirements to enhance the information provided to investors;
- whether its current requirements appropriately balance costs and benefits of disclosure;
- how it could facilitate investors’ access to disclosure through the modernization of presentation, aggregation and dissemination methods; and
- the challenges of current SEC disclosure requirements and potential challenges that may result from possible changes to Reg. S-K requirements.
The breadth of this undertaking is reminiscent of the SEC’s famous Aircraft Carrier Release from 1998, so named due to its massive size (nearly 600 pages) and the sweeping nature of its proposed amendments to Securities Act and Exchange Act rules and regulations. While that effort was substantially different from this current effort due to its focus on modernizing and clarifying an antiquated regulatory structure while improving investor protection, it is worth remembering that it ultimately collapsed under its own weight. The current concept release is far more targeted and less revolutionary and perhaps, therefore, has a more rosy future.
Below are some of the key categories of disclosures addressed by the SEC in its concept release, as well as some of the specific comments solicited by the SEC.
Principles-Based and Prescriptive Disclosure Requirements
Many disclosures in Reg. S-K are subjective, principles-based disclosures that rely on the company’s management to evaluate the significance of information in the context of its overall business and financial circumstances in order to determine whether disclosure is necessary. These disclosures are generally subject to the nebulous materiality threshold. Conversely, other Reg. S-K disclosures are objective, prescriptive requirements. These disclosures are triggered by quantitative thresholds and do not rely on the judgment of the company’s management.
The SEC recognizes that emphasizing principles-based disclosures and limiting prescriptive requirements could improve disclosure by reducing the amount of information that may be irrelevant, outdated or immaterial. However, it contends that shifting towards more principles-based disclosures may limit the comparability of one company’s disclosure to another’s, and also may result in less complete disclosures. The SEC is soliciting comments as to how it can most effectively balance the benefits of a principles-based approach while preserving the benefits of prescriptive requirements. The concept release also asks whether the materiality standard should continue to be used for its principles-based disclosure threshold, or whether there is an alternative method that would provide for more consistent disclosure.
The concept release cites a study indicating that the average registrant discloses 22 risk factors. It notes also that between 2006 and 2013 risk factor disclosures increased in length by 85%, which the SEC says is not necessarily associated with better disclosure.
In an effort to reduce boiler plate risk factors and instead elicit the most significant risk factors from registrants, the SEC seeks comment on how it can improve its risk factor disclosure requirements. Among other requests, the concept release asks:
- if the SEC should require registrants to present risk factors in order of the registrant’s management’s perception of magnitude or importance of each risk;
- what type of investors and audiences are the most likely to value risk factor disclosures;
- whether lengthy risk disclosures prevent investors from understanding the most significant risks; and
- if the SEC should require registrants to identify their ten most significant risks, and whether, in order to draw their attention to investors, those risks should be included in a section separate from the additional risk factors.
Disclosure of Information Relating to Public Policy and Sustainability Matters
The SEC operates under the view that the disclosure of environmental or other social concerns should not be required of all registrants unless to further a specific congressional mandate (for example, the conflict minerals rules), or, under particular facts or circumstances, such matters are material.
Over the years, many investors and interest groups have expressed a desire for greater disclosure of a variety environmental, social or governance concerns. These groups argue that public policy and sustainability matters are of increasing significance to voting and investment decisions. In response, and as noted in this Doug’s Note, voluntary company reporting of sustainability initiatives and performance has increased in recent years.
While the SEC has maintained that it generally is not authorized to consider the promotion of goals unrelated to the objectives of federal securities laws and recognizes that these types of disclosures may increase costs, the SEC asks if there are specific environmental or other social issues that are important to informed voting and investment decisions. The SEC has also requested comment on the additional challenges and costs that such disclosures would create.
Presentation and Delivery of Disclosures
Given advances in technology and how investors are now seeking and reviewing information, the SEC solicits investor and registrant input as to how disclosure information should be presented and delivered to the investing public. This inquiry coincides with the impressive and inventive voluntary strides that companies have made over the last few years to enhance the presentation and delivery of their disclosure. (See this Doug’s Note.)
Currently, the SEC only allows companies to link to another portion of the same filing, or link to other EDGAR filings. The SEC’s release asks if it should allow registrants to include external hyperlinks – to their company website, for example – in order to satisfy disclosure requirements.
With respect to company websites, the SEC seeks comment on whether companies should be permitted to incorporate by reference into their filings information displayed on their websites. If this were permitted, the release asks how the reporting and liability provisions of securities laws would be impacted given the more ephemeral nature of information posted online compared to information preserved in official filings. The SEC is also considering whether there are benefits in continuing to require disclosure of information that is readily available to investors on a registrant’s website.
The SEC’s release is over 300 pages long and aims to solicit comments on nearly every aspect of the disclosure requirements of Regulation S-K. Although unlikely to result in any immediate changes to the SEC’s disclosure requirements, future SEC rule promulgations are likely to be influenced by the comments received in response to this release.
If you, your industry group or other potential stakeholders have ideas or suggestions about how Reg. S-K can be updated or provide for more meaningful and streamlined disclosure, now would be a good time to let your voice be heard. Comments must be received by July 21, 2016.
Daniel Bethea, a Parker Poe summer associate, contributed to this Article.