The April 5, 2012 Congressional passage of the Jumpstart our Business Startups Act (the “JOBS Act”) required the SEC to conduct a thorough review of Regulation S-K, which is the foundation of reporting requirements for various SEC filings used by public companies. The main goal of the review was to analyze the current registration requirements of Regulation S-K, and determine if those requirements can be modernized and/or simplified. The primary effect of this was to reduce costs and other burdens associated with emerging growth companies, a new class of issuers whose IPOs were to be completed after December 8, 2011 and whose total annual gross revenues are less than $1 billion. However, the initiative has since expanded to all reporting companies.
Keith Higgins, the Director of the SEC’s Division of Corporation Finance, outlined the Commission’s plan to make its disclosure requirements more effective and the progress to date thereon in a speech to the ABA Business Law Section Spring Meeting in April, 2014. While the initial plan was to examine a perceived notion of “disclosure overload”, Higgins noted that an additional goal was that of “completeness” - to determine if there is information that should be disclosed, but currently is not.
The roadmap of the disclosure project started with the Division’s review of Regulation S-K requirements related to (i) business and financial disclosures that are made within Forms 10-K, 10-Q and 8-K filings, (ii) industry guides and form-specific disclosure, and (iii) scaling of disclosure provided by smaller reporting companies and emerging growth companies.
Specifics of the plan as presented by Higgins include:
- A reduction in repetition – This involves considering whether disclosure needs to be repeated in multiple sections of one disclosure document, and noted that cross-referencing may be more appropriate. A common area of repetition is in the area of critical accounting estimates, which often repeat information from the significant accounting policies within the notes to the financial statements.
- A focus on the company and not on that of similar companies – This suggestion was made as needless disclosure may occur with companies modeling their disclosure after that of a similar company or companies. Instead, companies should focus on what is most meaningful and relevant to their investors. Higgins’ focus here was on the sometimes voluminous risk factor disclosure.
- Elimination of outdated information – Higgins emphasized that disclosure initially included in response to SEC staff comments does not always need to remain in the filing, and that materiality and specific disclosure requirements should still serve as guidance on what to disclose.
- Elimination of discussion on accounts deemed immaterial – Higgins reiterated that it is not expected that registrants provide immaterial disclosures in their filings, or discuss immaterial accounts.
While the above discusses eliminating or reducing certain disclosure, there may be instances where more disclosure in a certain area will be required as part of the project.
The SEC is currently accepting input from stakeholders, which can be submitted using the SEC website’s Disclosure Effectiveness spotlight page, at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml.