Wednesday, April 13, 2016

SEC Concept Release on Financial Disclosures in form S-K: Risk, Reporting Frequency and Sustainability

Today (April 13, 2016), the SEC made public a much anticipated concept release regarding financial disclosures in form S-K.  The release seeks public comment on "modernizing certain business and financial disclosure requirements in Regulation S-K."  The comment period is open for the next 90 days. 

The release is 341 pages, so needless to say, I haven't gotten through the document. In it's entirety at least.  By my initial count there are over 35 substantive issues in the release and many more technical/procedures ones. I've highlighted 3 issues that are relevant to prior BLPB discussions:  Risk, Reporting Frequency and Sustainability.

Risk management and risk reporting in item 503(c) and 305 are addressed starting on page 146.

"[W]e consider whether requiring additional disclosure of management’s approach to risk and risk management and consolidating risk-related disclosure would, on balance, be beneficial to investors and registrants. We also seek to better understand how our disclosure requirements could be updated to enhance investors’ ability to evaluate a registrant’s risk exposures. We are especially interested in feedback on how we can improve the content and readability of the risk factors included in a filing as well as the potential advantages and disadvantages of different approaches to risk-related disclosure."

Reporting frequency as a component of the investor time horizons (aka short/long term investment) are discussed on page 280.  The Commission questioned the frequency of financial reporting noting the adoption of semi-annual reporting in 1955 and quarterly reporting in 1970. Summarizing the current debate on quarterly reporting, the Commission states:

"The value of quarterly financial reporting has been the subject of debate. Opponents of quarterly reporting argue that frequent financial reporting may lead management to focus on short-term results to meet or beat earnings targets rather than on long-term strategies. Consequently, some have argued that quarterly reports should be discontinued or made voluntary in the United States.

On the other hand, some advocates of frequent reporting, typically on a quarterly basis, point out that greater frequency improves the timeliness of earnings and reduces information asymmetry between managers and investors. Others are skeptical of the benefits of eliminating quarterly reporting requirements. According to one survey of institutional investors, fifty-eight percent of investors preferred to receive information on a quarterly basis to confirm or reframe expectations."

Specific requests for comments on financial reporting frequency are listed at pages 285-286.

Political spending and sustainability disclosures are discussed on page 205.  

"[S]ome have urged the Commission to adopt disclosure requirements on political spending. The Commission, however, has determined in the past that disclosure relating to environmental and other matters of social concern should not be required of all registrants unless appropriate to further a specific congressional mandate or unless, under the particular facts and circumstances, such matters are material.

We are interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions. In particular, we seek feedback on which, if any, sustainability and public policy disclosures are important to an understanding of a registrant’s business and financial condition and whether there are other considerations that make these disclosures important to investment and voting decisions. We also seek feedback on the potential challenges and costs associated with compiling and disclosing this information."

Specific comment requests regarding sustainability and political spending disclosures are listed on pages 213-215.

-Anne Tucker

Anne Tucker, Corporate Governance, Corporations, Securities Regulation, Shareholders | Permalink


I realize the SEC is quite constrained by the APA in the rulemaking process, but do wish it could just engage, on a consulting basis, a half dozen or so top analysts and investors, put them in a room for a few days and give them a document such as the DowDuPont S-4 and have each critique it as to what content matters and what does not. As both a writer and reader of mandated disclosure documents, I am frustrated that many documents have doubled or tripled in length in the past 40 years without anything approaching a corresponding level of improvement in reader-useful information. Four or five pages of "Risk Factors", seemingly including "the sky might fall", obscure what really matters. Tortured discussions of compensation committee processes when all investors really care about are the dollars? Too many words hide the ones that really matter.

Posted by: Craig Sparks | Apr 14, 2016 7:45:40 AM

Thanks for this, Anne. Do you think the SEC is seriously considering changing quarterly reporting? I assumed the Commission was essentially just paying lip service to the idea to shut up its critics.

Posted by: Ann Lipton | Apr 14, 2016 10:20:42 AM

Thanks for your comment Ann. No, I don't think that quarterly reporting will go away any time soon. Laurence D. Fink of BlackRock, however, is one of the more public and powerful advocates for ending quarterly reporting. See In my mind the best argument against changing the frequency is that, despite criticisms, there remain justifications for the information's release and for the continued coordination/synchronation of the delivery of such information to the market. To make information more episodic and varying between industries or companies would, in my mind, create more problems than it could cure.

Posted by: Anne Tucker | Apr 14, 2016 10:25:30 AM

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