SEC Releases JOBS Act Report on Review of Disclosure Requirements in Regulation S-K | Practical Law

SEC Releases JOBS Act Report on Review of Disclosure Requirements in Regulation S-K | Practical Law

The SEC released a report summarizing the SEC's review of disclosure requirements in Regulation S-K, as required by Section 108 of the JOBS Act, and recommending the development of a plan to systematically review the SEC's disclosure requirements.

SEC Releases JOBS Act Report on Review of Disclosure Requirements in Regulation S-K

Practical Law Legal Update 2-553-1045 (Approx. 6 pages)

SEC Releases JOBS Act Report on Review of Disclosure Requirements in Regulation S-K

by Practical Law Corporate & Securities
Published on 20 Dec 2013 • USA (National/Federal)
The SEC released a report summarizing the SEC's review of disclosure requirements in Regulation S-K, as required by Section 108 of the JOBS Act, and recommending the development of a plan to systematically review the SEC's disclosure requirements.
On December 20, 2013, the SEC staff issued a report to Congress on its disclosure rules for US public companies. The report was mandated by the JOBS Act, requiring the SEC to:
  • Comprehensively analyze the requirements of Regulation S-K.
  • Recommend to Congress how to update the requirements to modernize and simplify the registration process and reduce the costs and other burdens for the SEC and emerging growth companies (EGCs).
In the report, the staff conducts a full review of all the requirements of Regulation S-K for public companies generally, including the full history of the integrated disclosure system and how most of the requirements of Regulation S-K came about and evolved. Where applicable, the report also includes staff summaries of recommendations made by commenters on the SEC's website.
The staff saw limitations in conducting a review that did not look at the disclosure regime as a whole. As a result, the staff's review is intended to facilitate the improvement of disclosure requirements applicable to companies at all stages in their development, not only for emerging growth companies.
The report highlights that the last comprehensive review of the SEC's disclosure requirements was conducted in 1996 by the Task Force on Disclosure Simplification. In light of the many technological, legal and market changes since that time, the staff believes that disclosure requirements should be reevaluated to ensure meaningful, non-duplicative information is available and continues to be material and that the disclosure requirements are flexible enough to adapt to dynamic circumstances.

Further Review and Reevaluation Necessary

The staff views this required study as a starting point, with further information gathering and review warranted to formulate specific recommendations regarding specific disclosure requirements. The staff would seek input from market participants, including issuers of all sizes, investors of all sizes, intermediaries, exchanges, analysts, legal and accounting professionals, industry and professional organizations, economists and academics.
The staff recommends the development of a plan to systematically review the SEC's disclosure requirements in both rules and forms, including Regulation S-K, Regulation S-X and the rules concerning the presentation and delivery of information to investors and the marketplace. Importantly, the staff calls for the review to include disclosure requirements developed through interpretations in SEC releases and staff interpretations and guidance, perhaps to incorporate guidance into the disclosure requirements themselves as one commenter suggested.
In addition, the review would consider whether there are factors external to the SEC's rules that may have contributed to the length and complexity of company filings and the costs of compliance, for example, enforcement actions and judicial opinions. After conducting the review and related information gathering, the staff would recommend to the SEC proposals for revisions to the comprehensive disclosure requirements.
The staff identified two alternative frameworks for structuring this review: a comprehensive approach and a targeted approach.

Comprehensive Approach

The comprehensive approach includes reviewing and updating requirements on a wholesale basis, taking into account the appropriateness of substantive requirements as a whole as well as presentation and delivery issues. This approach would address the interplay between all sources of disclosure requirements while keeping the focus on disclosure that is relevant to the total mix of information and would better address repetition in filings. The staff acknowledges, however, that this approach would likely be a longer-term project involving significant staff resources across the SEC.

Targeted Approach

The targeted approach includes reviewing and updating requirements on a topic by topic basis. This approach might allow for a more in-depth analysis of each topic and allow changes to be made more quickly. In addition, a targeted approach could allow the staff to identify and prioritize the review of the most challenging aspects of the current rules. However, a targeted approach could inhibit efforts to simplify the disclosure regime as a whole, resulting in less streamlined disclosure overall.

Staff Recommendation

The staff recommended the comprehensive approach in order to be able to achieve the dual goals of streamlining requirements for companies, including EGCs, and focusing on useful and material information for investors. The staff commented that this is due, in part, to the nature of events and changes that have occurred since the last comprehensive review in 1996, and in part to balancing the economic principles outlined below (see Economic Principles).

Issues to Address

In conducting the further review, the staff believes it should address the following four major issues:
  • Emphasis of a principles-based approach as an overarching component of the disclosure framework, in order to address the tendency toward implementation of increasing layers of static requirements while preserving the benefits of a rules-based system.
  • Appropriateness of current scaled disclosure requirements and whether further scaling would be appropriate for EGCs or other categories of issuers.
  • Methods of information delivery and presentation, both through EDGAR and other means. For example, a delivery framework that separates core disclosures that rarely change, disclosure that changes period-to-period and specific transactional disclosure.
  • Presenting information in ways that would improve the readability and navigability of disclosure documents and exploring methods for discouraging repetition and the disclosure of immaterial information. Interestingly, the staff suggested the review could reevaluate the use of quantitative thresholds and other standards of materiality incorporated into the rules.

Specific Areas Needing Review

The staff identified specific areas of Regulation S-K that could benefit from further review:
  • Risk-related requirements: identify whether different risk-related disclosures should be required.
  • Requirements relating to a registrant's business and operations: account for changes that have occurred in the way that businesses operate.
  • Corporate governance disclosure requirements: review requirements to confirm that the information required is material and avoids boilerplate.
  • Executive compensation requirements: disclosures in this area have become lengthy and technical and the review should evaluate whether further scaling is appropriate.
  • Offering-related requirements: requirements should be reviewed in light of the changes in offerings and the shift from paper-based offering documents to electronically-delivered offering materials.
  • Exhibit requirements: the last comprehensive review of exhibit requirements was conducted in 1980 and the list has since grown and some exhibit filings can be difficult to locate on EDGAR.
  • EGCs: further consideration of the criteria to be used for purposes of eligibility for potential further scaling of disclosure requirements and how companies should migrate to a standard disclosure regime.
  • Industry guides: review the Industry Guides to evaluate whether they still elicit useful information and conform to industry practice and trends.
  • Regulation S-X: comprehensive review of financial reporting requirements.
  • Rules and forms: review the disclosure requirements that are contained in rules and forms, such as Form 10-Q and Form 8-K.

Economic Principles

The staff also highlighted economic principles that should be considered when reviewing and considering changes to disclosure requirements:
  • Improving and maintaining the informativeness of disclosure to existing security holders, potential investors and the marketplace, which is particularly relevant to EGCs that need capital to invest in their businesses.
  • The historical objectives of a given rule should be considered, including a consideration of any specific disclosure gaps, mandated policy objectives or other conditions sought to be addressed by a given requirement’s adoption, whether such conditions are still applicable, and if not, whether the potential for a return of those conditions poses risks to potential scaling or elimination of the requirement.
  • Whether the information provided by a given rule is available to existing security holders, potential investors and the marketplace on a nondiscriminatory basis from reliable sources and if so, any costs or benefits to these persons from obtaining the information from sources other than the issuer, including the ability of investors to seek appropriate redress.
  • The extent to which a given disclosure requirement entails high administrative and compliance costs, especially for EGCs.
  • The extent to which disclosure of a company's proprietary information may have competitive or other economic costs, which may be particularly relevant to EGCs.
  • Maintenance of the SEC's ability to conduct an effective enforcement program and deter fraud, especially regarding disclosures shown to be instrumental in detection and deterrence.
  • The importance of maintaining investor confidence in the reliability of public company information in order to encourage capital formation, among other things.