Thursday, August 7, 2014
On June 5, 2014, SEC Commissioner Dan Gallagher commemorated the agency’s 80th anniversary by, among other things, repeating the criticisms of the various nonfinancial disclosures that companies are compelled to make by law or asked to make through shareholder proposals. In his view, “companies’ disclosure documents are being cluttered with non-material information that can drown out or obscure the information that is at the core of a reasonable investor’s investment decision. The Commission is not spending nearly enough time making sure that our rules elicit focused, meaningful disclosures of material information.” I assume that he is referring to the various environmental, social and governance proposals (“ESG”) brought by socially responsible investors and others. I’m writing this blog post while taking a break from reviewing dozens of these proposals for an article that I am writing on how consumers and investors evaluate ESG disclosures and those required in other countries in the human rights context.
Citing Chair White’s quote about “information overload,” last week the US Chamber of Commerce’s Center for Capital Markets Competitiveness released a list of relatively non-controversial recommendations on how the SEC can modernize the current disclosure regime so that it can better serve the investing public. For a great discussion of what led to this latest round of disclosure reform see here. Some of the recommendations concern items that technology can handle. Others concern repetition and relate to factors that the SEC does not require but are there to avoid litigation. The report, entitled “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors and Facilitates Capital Formation,” focuses on near-term improvements to Regulation S-K that the Chamber believes would likely garner widespread support. The report also discusses longer-term proposals, but does not discuss in any detail the kinds of issues that Chair Gallagher and others raise. You can also watch an entire webcast of the panel discussion releasing the report featuring, among others, two former SEC Commissioners, current SEC Director of the Division of Corporate Finance Keith Higgins, and issuers counsel, including my former colleague from Ryder, Flora Perez, here (start at minute 19:45).
Full disclosure-- I was part of the working group that reviewed some of the recommendations and gave comments before the report’s release, and while I also oppose the conflict minerals disclosure because I don’t think it should be within the SEC’s purview and didn’t take into account some of the realities of the modern supply chain, I don’t have a complete aversion to corporate disclosure of ESG or other risk factors to investors and the public. The who, what, why, how, where and when are the key questions.
Below is a list of all of the recommendations for reform taken directly from the Chamber’s one-pager:
Near Term Improvements:
The requirement to disclose in a company’s Form 10-K the “general development” of a business, including the nature and results of any bankruptcy, acquisition, or other significant development in the lifecycle of a business (Item 101(a)(1) of Regulation S-K)
The requirement to disclose financial information for different geographic areas in which a company operates (Item 101(d) of Regulation S-K)
The requirement to disclose whether investors can obtain a hard copy of a company’s filings free of charge or view them in the SEC’s Public Reference Room (Items 101(e)(2) and (e)(4) of Regulation S-K)
The requirement to describe principal plants, mines, and other materially important physical properties (Item 102 of Regulation S-K)
The requirement that companies discuss material legal proceedings (Item 103 of Regulation S-K)
The requirement to disclose which public market a company’s shares are traded on and the high and low share prices for the preceding two years (Items 201(a)(1)(i), (ii), (iii), and (iv) of Regulation S-K)
The requirement to disclose the frequency and amount of dividends for a company’s stock during the preceding two years (Item 201(c) of Regulation S-K)
The requirement to display a graph showing the company’s stock performance over a period of time (Item 201(e) of Regulation S-K)
The requirement to disclose any changes in and disagreements with accountants (Item 304 of Regulation S-K)
The requirement to disclose certain transactions with related parties (Item 404(a) of Regulation S-K)
The requirement to disclose the ratio between earnings and fixed charges (Item 503(d) of Regulation S-K)
The requirement to file certain exhibits (Item 601 of Regulation S-K)
The requirement to disclose recent sales of unregistered securities and a description of the use of proceeds from registered sales (Item 701 of Regulation S-K)
Longer Term Improvements:
Compensation Discussion & Analysis (CD&A)
Management’s Discussion and Analysis (MD&A)
A Revised Delivery System
Take a look at the list, read the report which describes the Chamber's rationale, and if you have time watch the webcast, which provides some real-world context. What’s missing from the list? What shouldn’t be on the list? Have you seen anything in your practice or teaching that could inform the debate? I look forward to seeing your feedback on this site or via email at firstname.lastname@example.org