Changes to disclosure requirements are on the horizon as the SEC ponders updating its rules in an effort to make information more useful for investors.
The commission is reviewing specific sections of regulations S-K and S-X to see if requirements can be updated, SEC Division of Corporation Finance Director Keith Higgins told the American Bar Association’s Business Law Section during a speech Friday.
The goal is to eliminate duplicative disclosures while continuing to provide material information and reducing costs and burdens on companies. In addition, the SEC wants to consider ways to harness technology to help companies share information with investors more efficiently.
“We want to explore whether the focus and navigability of disclosure documents can be improved using structured data, hyperlinks, or topical indexes,” Higgins said. “There are a variety of potential approaches.”
Also under consideration is a new system that would disclose certain information that does not change frequently—such as the description of the business—in a core document that would be supplemented by periodic and current reports.
“This approach has a lot of appeal in its ease and simplicity,” Higgins said. “But how would changing to such a system affect the rhythm, timing, and certainty of updating periodic reports? Would investors reasonably expect that material changes in ‘core’ information would be updated promptly?”
As the SEC ponders these and other changes to disclosure requirements, Higgins said there are things financial statement preparers can do to decrease disclosure overload:
- Reduce repetition. Many times companies repeat—exactly—disclosure from their significant accounting policies footnote in their MD&A discussions of critical accounting estimates, Higgins said. “Before you repeat anything in a filing, please step back and ask yourself, ‘Do I need to say it again?’ ” Higgins said.
- Focus disclosures. Investors would benefit if companies disclosed their risk factors in a way that would highlight the material risks, Higgins said. Including disclosures that are made by other companies—or have been identified as “hot button” issues in general by the SEC—can lead to overload if these disclosures don’t apply to the particular reporting company, Higgins said.
- Eliminate outdated or immaterial information. Companies should regularly review their disclosures to determine whether they are material to investors, Higgins said. If they are not material, they can be removed, he said. “It is perfectly all right to remove disclosure when it is immaterial or outdated even if it was included in a prior filing in response so a [SEC] staff comment,” Higgins said.
— Ken Tysiac ( firstname.lastname@example.org ) is a JofA senior editor.