SEC Chairman Mary Jo White Addresses SEC Disclosure Requirements
On October 15, 2013, Mary Jo White, new chairman of the Securities and Exchange Commission (“SEC”), delivered a speech before the National Association of Corporate Directors. She chose to discuss possible changes in SEC disclosure requirements for SEC registrants.
She began by pointing out that initial and periodic disclosure, which was mandated by the Securities Act of 1933 and the Securities and Exchange Act of 1934, is of critical importance because without proper SEC disclosures investors would be unable to make informed decisions.
As she put it, “They would not know about the financial condition of the company they are investing in”. Nor would they know about how the company operates, who its board members are or what business, operational or financial risks the company faces, let alone may face in the future.” Over the decades, the kind and amount of disclosures publicly traded companies must make have increased in number and in detail, not always as a result of SEC rules or guidance.
White doesn’t believe that excessively long and complex filings are necessarily a good thing. “Information overload,” which she defines as a “phenomenon in which ever-increasing amounts of disclosure make it difficult for an investor… to ferret out the information that is most relevant,” can be counterproductive to the SEC’s aims.
Over the years, some simplification has been introduced, as, for example, when a special disclosure regime for smaller companies (Regulation S-B) was eliminated to reduce burdens on those companies. More recently, Congress passed the JOBS Act, which mandated that the agency analyze its disclosure requirements with a view to scaling them back for “emerging growth companies.” The SEC is preparing a report that will be made available to the public soon.
Emphasizing the fact that the purpose of disclosure is to “provide a reasonable investor with the information that he or she would need to make an informed investment or voting decision,” White notes that some required information may no longer be appropriate. For example, historical closing price information for companies’ common stock, which must be offered in Forms 10-K, can now easily be found on the internet. Other similar information may be less relevant now than it once was.
What points to three possible reasons for excessively long and complex filings: the Commission’s rules, legislative mandates, and investor demand or a company’s wish not to risk possible litigation.
She believes that “risk factor” disclosures may be too long and too detailed, as can executive compensation disclosure. In addition, some information in, say, a 10-K is repeated. An account of legal proceedings appears in its own section—“legal proceedings”—and also among the risk factors, management’s discussion and analysis, and in the notes to the financial statements. White says companies and accountants often complain about this and other redundancies, and asks whether investors benefit from the repetition.
Many of the agency’s “industry guides” are outdated. Those for bank holding companies and the mining industry fail in many ways to take into account changes that have occurred in recent decades in both sectors.
White realizes that no system of disclosure will satisfy everyone. What’s too much for some isn’t enough for others. She closed her address by saying that she hopes corporate directors will “join with us as we move… forward to create the optimal disclosure regime – one that serves the needs of investors and is embraced by businesses large and small.”
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