Thursday, July 7, 2016

Revising Regulation S-K

SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”

Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:

  • whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
  • whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
  • whether, and if so how, we could revise our requirements to enhance the protection of investors;
  • whether our current requirements appropriately balance the costs of disclosure with the benefits;
  • whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;
  • whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and
  • any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.

As of this evening, thirty comments had been submitted including from Wachtell Lipton, which cautions against “overdisclosure” and urges more flexible means of communicating with investors; the Sustainability Accounting Standards Board, which observes that 40% of 10-K disclosures on sustainability use boilerplate language and recommends a market standard for industry-specific disclosures (which SASB is developing); and the Pension Consulting Alliance, which agrees with SASB’s methodology and states that:

[our] clients increasingly request more ESG information related to their investments. Key PCA advisory services that are affected by ESG issues include:

  • Investment beliefs and investment policy development
  • Manager selection and monitoring
  • Portfolio-wide exposure to material ESG risks
  • Education and analysis on macro and micro issues
  • Proxy voting and engagement

This is an interesting time for people like me who study disclosures. Last week the SEC released its revised rule on Dodd-Frank §1504 that had to be re-written after court challenges. That rule requires an issuer “to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.” Representative Bill Huizenga, the Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, introduced an amendment to the FY2017 Financial Services and General Government (FSGG) Appropriations bill, H.R. 5485, to prohibit funding for enforcement for another governance disclosure--Dodd-Frank conflict minerals.

SEC Chair White has herself questioned the wisdom of the SEC requiring and monitoring certain disclosures, noting the potential for investor information overload. Nonetheless, she and the agency are committed to enforcement. Her fresh look at disclosures reflects a balanced approach. If you have some spare time this summer and think the SEC’s disclosure system needs improvement, now is the time to let the agency know.

Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Human Rights, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink


Hey, Marcia. Thanks for continuing to keep us posted on this. As you know, I am very interested in the Regulation S-K project.

You start your post with a simple premise: "SEC disclosures are meant to provide material information to investors." Is that always right? I agree that a lot of Regulation S-K is geared principally to that objective. But there's a lot more there, isn't there? (That's a lot of "theres." Sorry!)

I have focused a lot in my thoughts of late on the value of standardization that Regulation S-K brings to the information equation. Honestly, some of the information required under existing Regulation S-K items would not meet, imv, the Basic v. Levinson materiality test (although it always depends on how the test is applied by a court looking backwards . . . ). But having comparative information may have value to the market, despite the lack of importance of the specific information to shareholders or investors (depending on context) or the significance of the specific information to the total mix of available information.

So, my big question about the SEC's project is a simple one to state but perhaps a tougher one to answer: what policy objectives should Regulation S-K serve? Any comments submitted to the SEC may implicitly take the answer(s) to that question into account. But I would like to see more express discussion on the question, wouldn't you? And maybe you have been a part of those conversations; they may just be taking place outside my earshot. I would be interested in knowing more, however, if there is more to know in this regard.

Posted by: joanheminway | Jul 9, 2016 11:35:43 AM

Joan, thanks for these thoughtful comments and I agree with your premise. I have worked on a disclosure task force and the issue of the SEC's objectives and the disconnect between the disclosures has been a prime concern. Your questions are also reflected in some of the comments that have been posted on the SEC's site and I plan to read though all of the comments at some point and see if there are common themes.

Posted by: MARCIA NARINE | Jul 9, 2016 4:16:57 PM

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