On April 13, 2016, the Securities and Exchange Commission voted to issue a 341-page Concept Release to revisit and seek public comment on the business and financial disclosure requirements of Regulation S-K. The Concept Release focuses on whether the business and financial disclosures required in periodic reports and registration statements continue to provide information that is important to a modern investor. The Concept Release is organized around three topics:
- the disclosure framework,
- the line item requirements of Regulation S-K, including expanded requirements related to sustainability and corporate citizenship and potential revisions to existing quarterly reporting requirements, and
- the presentation and delivery of information.
The Concept Release includes a historical analysis of the items on which it seeks comment that may be helpful to registrants and securities law practitioners.
Regulation S-K was originally adopted to harmonize the disclosure requirements under both the Securities Act and the Exchange Act. In 1982, Regulation S-K was expanded and reorganized to be the central repository for non-financial statement disclosure requirements, and many of the line item requirements have changed little since that time. The Concept Release is part of the SEC’s Disclosure Effectiveness initiative that began in 2013, as required by the JOBS Act and designed to update and modernize disclosure requirements.
The Concept Release describes Regulation S-K as a fundamentally “principles-based” framework with elements that are prescriptive or “rules-based.” The principles-based portion of Regulation S-K frequently relies on management to determine when information is material to investors—as defined by the U.S. Supreme Court, information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision—and therefore must be disclosed to satisfy a disclosure objective established by the SEC pursuant to the Securities Act and the Exchange Act. The rules-based portion of Regulation S-K, on the other hand, relies on bright-line tests instead of management’s judgment to determine when disclosure is required. The SEC requests comment on a wide variety of topics concerning the advantages and disadvantages of each disclosure system, the standard for determining whether information is material and how the chosen framework might impact corporate compliance efforts and governance structures. The SEC also requests comment concerning the level of investor sophistication that should be assumed under a disclosure framework and whether the current disclosure requirements appropriately consider the costs of disclosure.
Line Item Requirements
The SEC seeks comment on the specific line item requirements of Regulation S-K, whether any disclosure requirements should be modified or eliminated and whether any new disclosure requirements should be added. The specific line items the SEC identifies fall within six broad categories:
- core company business information (Items 101 and 102),
- company performance (Items 301, 302 and 303),
- risk (Items 305 and 503),
- securities (Items 201, 202, 701 and 703),
- industry guides, and
- exhibits (Item 601).
Two other topics considered in this section may be of particular interest to registrants and practitioners:
- expanded requirements to disclose environmental, social or governance, or “ESG,” matters, and
- reconsideration of the present quarterly reporting regime.
ESG Matters. The SEC recognizes among some investors and interest groups a desire for additional disclosure on public policy and sustainability issues and seeks comment on whether and how such disclosures should be drafted. Among other ESG topics, the SEC identified climate change, resource scarcity, corporate social responsibility and corporate citizenship, areas in which a subset of investors desire new disclosure requirements.
Quarterly Reporting. The SEC examines the efficacy and desirability of the quarterly reporting regime for public companies, suggesting that less frequent reporting may be appropriate for some registrants. For example, the SEC asked for comment on whether semi-annual reporting or another less frequent reporting basis would be appropriate for smaller reporting companies or companies not listed on a national securities exchange. Similarly, the SEC asked whether it should consider an abbreviated quarterly report for the first and third fiscal quarters.
Presentation and Delivery
Chair Mary Jo White, in prepared remarks, summarized the third topic of the Concept Release as an effort to assess “how various investors actually interact with companies’ disclosures, what matters most to them, and what methods of delivery enhance the accessibility and intelligibility of the information provided.” In this section, the SEC poses questions on a variety of related topics, including cross-referencing, incorporation by reference, hyperlinks, company websites and formatting requirements.
Although the Concept Release does not revisit other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants, Commissioner Kara M. Stein characterized it as a first step in a “dialogue on how to modernize and improve the Commission’s disclosure framework.”
Comments may be made for 90 days following the Concept Release’s publication in the Federal Register and may be submitted electronically through the SEC’s website.
The Concept Release is available for review here.