Providing transparent, accurate and timely information to investors is certainly of utmost importance. However, preparers and users of filings prepared pursuant to Securities and Exchange (SEC) regulations may feel that the information provided in filings has become repetitive and cumbersome. Many of the disclosure requirements in Regulations S-K and S-X have not changed since they were adopted dating back to the 1930s. Over the years additional disclosure requirements have been added which has resulted in filings becoming voluminous and arguably less effective.
A few years ago, the SEC commenced a disclosure effectiveness initiative to identify ways to not only reduce the volume of disclosures but also to identify potential gaps in disclosures or opportunities to increase transparency. The goal is to comprehensively review the requirements and make recommendations on how to update them to facilitate timely, material disclosure by companies and shareholders’ access to that information. The initiative came about following a December 2013 study of disclosure requirements in Regulation S-K which was required by the Jumpstart Our Business Startups Act. In the study, the SEC’s Division of Corporate Finance recommended an extensive and comprehensive review of the existing disclosure requirements be conducted. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) also have taken steps to seek ways to improve disclosures in the financial statements notes.
In July 2015, the SEC issued a proposal for comment that seeks to improve the effectiveness of disclosures and simplify the compliance requirements while maintaining the necessary information that is key to investors. Many of the proposed amendments are in response to changes in SEC disclosures, U.S. generally acceptable accounting principles (GAAP), and International Financial Reporting Standards (IFRS), and to reflect advances in technology that have occurred subsequent to the original rules being adopted. While the proposed amendments would eliminate or modify certain disclosures in some cases it may also mean adding new or revised reporting requirements. The proposed amendments include removing redundant requirements that provide the same disclosures as U.S. GAAP; eliminating overlapping disclosures that are related to, but not the same, as other disclosure requirements or disclosures that are no longer useful to investors; integrating disclosures that overlap with other SEC disclosure requirements but require incremental information; and modifying or deleting outdated or superseded provisions. In some cases, the proposed changes would move disclosures between the financial statements and other sections of periodic reports (10-Ks, 10-Qs). Information moved into the financial statements would become subject to audit, review, internal control over financial reporting (ICFR) and eXtensible business reporting language (XBRL) requirements. Also of note, unless the FASB provides exemptions, if disclosure requirements are made part of U.S. GAAP it could potentially impact smaller reporting companies that had previously been exempt from certain disclosures required of larger public entities. The SEC extended the original 60 day comment period ending in early October 2016 to November 2, 2016 to allow sufficient time for commenters to fully consider the proposal and provide thoughtful, comprehensive comments.
As the SEC and FASB continue to work on their disclosure effectiveness initiatives and review comments received on the proposed amendments, it is advisable for companies to assess their current disclosures and begin to make enhancements that provide investors with information that is more meaningful and easier to understand. This may include reducing repetitive disclosures, ensuring disclosures are focused on material information, and eliminating outdated information. Cluttering up documents with immaterial and outdated information is likely not serving the needs of investors well and may, in fact, be clouding their investment decisions. Taking immediate steps to improve the quality of information provide to shareholders and potential investors could go a long way toward greater investor confidence.
Tammy Gamble is a partner based out of our Rochester, NY office.