The quest for more effective disclosure

In Rules and enforcement trends in compliance for 2015, an article in Corporate Secretary’s Winter issue (see page 18), a partner at Mayer Brown urges companies to monitor a disclosure effectiveness initiative announced by the SEC’s division of corporation finance last April. A proposed rule that would update and modernize the disclosure requirements of Regulation SK and Regulation SX – the basis for most company disclosures – could come out as early as this year. The New York chapter of the Society of Corporate Secretaries and Governance Professionals will likely discuss this and other matters at a question and answer session to be held on Thursday, February 12, with Betsy Murphy, the division’s associate director. 

Last week at a seminar co-hosted by the Millstein Center for Global Markets and Corporate Ownership and the Center for Audit Quality, a representative from the SEC and other governance experts spoke on a panel about some of the issues under consideration to make disclosures more meaningful. Heading the list was whether principles-based disclosures would be preferable to prescriptive – or line item-type – disclosures based on how investors use both types to inform their portfolio decisions.

Two factors that define the SEC’s efforts to reconsider disclosure effectiveness are the costs and other burdens on registrants of providing disclosures and the need to protect investors. The agency is also weighing whether thresholds for scaled disclosures by smaller and emerging growth companies are appropriate. Some firms are being proactive by eliminating certain disclosures that were relevant a few years ago but are less so now, the SEC representative reported.    

On last week’s panel, a law professor who focuses on executive compensation expressed his concern about how the debate over effective disclosure has proceeded until now. He noted that it seems to have been driven by ‘pent-up frustration’ about ‘outdated requirements’ that some people want eliminated in order to make compliance by companies easier. ‘We should ask what disclosures are trying to accomplish in communicating with investors,’ he said. ‘If every company takes its own approach to disclosure, it will make it harder for investors to compare companies. We should have simplified rules that make it easy for investors to compare companies.’ He added that it’s almost impossible for investors to get information out of the qualitative footnotes some companies provide in their financial filings.

The kinds of changes made to disclosure also have an impact on which investors participate in the market and how, the law professor explained. One result of the reduced disclosure requirements for emerging growth companies under the Jumpstart Our Business Startups Act is that there is much less investment in these securities by retail investors than institutional investors in comparable securities. The SEC representative said one suggestion was for layered disclosures that would enable different investors to access the level of disclosure they need.

There are also significant inefficiencies in EDGAR, the electronic filing system most investors use to search corporate filings. The SEC is exploring whether EDGAR might be able to display information about a company in various categories to appeal to certain kinds of investors and possibly make filings more easily searchable.

All of these considerations still center on the presentation of financial data, of course. And that doesn’t address the fact that more and more investors say they now find non-financial disclosures, such as those regarding companies’ environmental and social policies, to be most helpful.