SEC Staff Issues Report with Recommendations to Numerous Regulation S-K Disclosure Requirements

In December 2013, the Securities and Exchange Commission (“SEC”) submitted a report to Congress recommending a comprehensive review of the disclosure requirements of Regulation S-K (“S-K”) to identify ways to simplify the filing and disclosure requirements for public filers.

S-K provides the current disclosure requirements for registration statements and ongoing filing requirements, except for financial statements, for public entities. In accordance with Section 108 of the Jumpstart Our Business Startups Act (the “JOBS Act”), the SEC was required to perform a review of the S-K provisions to identify ways to scale back, or lessen the burden, for emerging growth companies.As defined by the JOBS Act, an emerging growth company is generally defined as a filer with total revenue of less than $1 billion who has not yet registered on an exchange.

The SEC determined that a review of S-K should consider the best interests of investors and all public entities, not just those of emerging growth companies, to avoid limiting the benefit of the study.The staff of the SEC performed their study by first focusing on the history and reasons for developing the current S-K rules.Next, an in depth review of the disclosure requirements was performed. Finally, the SEC concluded with their opinion on the appropriate next course of action. The focus of the SEC’s study was to consider the relevance of information available to investors while weighing the cost burden to companies.Their study yielded the following concerns regarding public filings: 1) immaterial and unnecessary information that may mislead or redirect user focus, 2) repetitive disclosures, 3) overly complex disclosures, 4) difficult filing process and inefficient use of technology, and 5) excessive information that overburdens users.

The SEC evaluated future methods to address these concerns by considering a review through either a comprehensive or targeted approach. A targeted approach would focus on addressing issues individually which would result in the quick enactment of changes.A comprehensive approach would be a complete study to encompass all disclosure requirement related issues of S-K and how different rules interact and overlap.

A main reason why the SEC believes a comprehensive review is necessary is because there have been major advances in technology and significant events that have affected the capital markets since the last comprehensive review was performed in 1996 (the 1996 Task Force on Disclosure Simplification).

The SEC recommends that a comprehensive analysis should focus on altering the disclosure requirements for all companies by performing the following:

• Emphasizing a principles-based approach would limit the voluminous set of rules that are currently included in the regulations.There will be more judgment put at the responsibility of corporate officers to make decisions on the information included in public filings. This is compared to the current rules-based approach to the rules and regulations, which require less judgment but more technical understanding and familiarity with the regulations.There are many corporate officers that have the tendency to include too much or excessive information in public filings out of the fear of not conforming to a particular requirement.
• Further scaling back and simplifying the disclosure requirements will provide investors with concise information to make investment decisions, and also lessen the time and cost burden on public filers. There is currently an overload of information that is either repetitive or not significant to the investor. This is the result of the evolution of the rules-based regulations and the “increasing layers of static requirements”.The original purpose of a particular disclosure requirement may be lost over time or no longer understood or applicable to investors.
• The delivery method and presentation can be improved largely due to the advances in technology.The SEC has suggested reevaluating the nature and frequency that certain information is filed by segregating this information into three categories: 1) core company information 2) periodic changes each period 3) significant transactions.There will also be a study performed on the EDGAR electronic filing system to determine if there are more efficient methods available, which would allow companies to either file themselves or have less reliance on outside firms.
• The readability and navigability of disclosure information can be improved through the use of technology, such as utilizing hyperlinks.This would also address the issue of reducing the amount of repetitive disclosures.Due to the extent and complexity of information included in public filings, investors may no longer understand or experience confusion when determining their meaning and making decisions and finding what they are looking for.

The SEC has clearly made their recommendations and believes a comprehensive review of S-K is necessary, as opposed to a targeted “quick-fix” approach. The primary goal is to improve the quality of information available to investors with a secondary goal to improve corporate efficiencies and reduce the cost burdens.According to the SEC, these changes will take a significant amount of time to implement, but is necessary to obtain the greatest long-term benefit. The purpose of this endeavor was initially to develop recommendations and lessen the filing requirement burden for emerging growth companies, but has now evolved into an initiative to improve the relevance of all disclosure requirements for the benefit of investors and the reporting landscape for all public companies.

For more information, the Report on Review of Disclosure Requirements in Regulation S-K is available on the SEC’s website as follows: http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf

John Rushford contributed to this article.