Securities Regulation and Corporate Governance

:

Securities Regulation and Corporate Governance > Posts > SEC Proposes Amendments to Update and Simplify Disclosure Requirements As Part of Overall Disclosure Effectiveness Review
SEC Proposes Amendments to Update and Simplify Disclosure Requirements As Part of Overall Disclosure Effectiveness Review

At its July 13, 2016 open meeting, the Securities and Exchange Commission (the “Commission”) voted to propose amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”), and technology.  The release approved by the Commission (the “Proposing Release”) is part of the disclosure effectiveness review being conducted by the Commission’s staff (the “Staff”).  It is also part of the Commission’s work to implement the Fixing America’s Surface Transportation (FAST) Act, which, among other things, requires the Commission to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary.

At the meeting, the Commissioners and Staff focused on the principles used to approach the proposed amendments (the “Proposed Rules”), leaving discussion of the actual amendments for the Proposing Release, which is available here.  Below is a summary of the approaches taken by the Staff in the Proposing Release and examples of amendments that fall under those approaches.   

  • Redundant or Duplicative Requirements (Requirements that require substantially the same disclosures as GAAP, IFRS, or other Commission disclosure requirements). 
    • The Proposed Rules would delete these requirements in light of requirements elsewhere.
      • Examples:  The existing requirements proposed for deletion include provisions of Regulation S-X related to, among other things, foreign currency, consolidation, obligations, income tax disclosures, related parties, contingencies and earnings per share.  A complete table of the proposed amendments in this area begins on page 23 of the Proposing Release.
  • Overlapping Requirements (Requirements that are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements). 
    • The Proposed Rules would delete Commission disclosure requirements that:  require disclosures that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with overlapping GAAP, IFRS, or Commission disclosure requirements, or require disclosure incremental to the overlapping GAAP, IFRS, or Commission disclosure requirements and may no longer be useful to investors.
      • Examples:  Among the requirements proposed to be deleted are the following:  the requirement to disclose financial information (specifically, revenues from external customers, a measure of profit or loss and total assets) about segments under Item 101(b) of Regulation S-K; the requirement to disclose financial information by geographic area under Item 101(d)(2) of Regulation S-K and risks associated with an issuer’s foreign operations and any segment’s dependence on foreign operations under Item 101(d)(3) of Regulation S-K; the requirement to discuss seasonality under Item 101(c)(1)(v) of Regulation S-K; the requirement to disclose the frequency and amount of cash dividends declared under Item 201(c)(1) of Regulation S-K; the requirement to disclose research and development activities under Item 101(c)(1)(xi) of Regulation S-K; the requirement to discuss securities authorized for issuance under equity compensation plans in an equity compensation plan information table under Item 201(d) of Regulation S-K; and the requirement to provide a ratio of earnings to fixed charges under Item 503(d) and Item 601(b)(12) of Regulation S-K.  For most of the examples mentioned above, the Proposing Release notes that GAAP requires that similar information be included in the notes to the financial statements.  A complete discussion of the proposed deletions in this area begins on page 34 of the Proposing Release.
    • The Proposed Rules would integrate Commission disclosure requirements that overlap with, but require information incremental to, other Commission disclosure requirements.
      • Examples:  Among the requirements proposed to be integrated is the requirement to discuss restrictions on dividends and related items under Item 201(c)(1) of Regulation S-K.  A complete discussion of the proposed integrations begins on page 80 of the Proposing Release.
    • The Proposed Rules would solicit comment on certain Commission disclosure requirements that overlap with, but require information incremental to, GAAP to determine whether to retain, modify, eliminate, or refer them to the Financial Accounting Standards Board (“FASB”) for potential incorporation into GAAP.
      • Examples:  Among the requirements proposed to be modified, eliminated or referred to FASB are the following:  the requirement to provide disclosure of the amount of revenue from products and services under Item 101(c)(1)(i) of Regulation S-K; the requirement to discuss major customers under Item 101(c)(1)(vii) of Regulation S-K; and, notably, the requirement to disclose legal proceedings under Item 103 of Regulation S-K. A discussion of these items begins on page 86 of the Proposing Release. 
         
  • Outdated Requirements (Requirements that have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment). 
    • The Proposed Rules would amend these outdated requirements and require additional disclosure of information to reduce any loss of information or increased burdens for investors.
      • Examples:  The outdated requirements proposed to be amended relate to, among other things, stale transition dates, income tax disclosures, the availability of information in the Commission’s Public Reference Room, and stock price information that is now widely available.  A discussion of these proposed amendments begins on page 109 of the Proposing Release. 
         
  • Superseded Requirements (Requirements that are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP requirements). 
    • The Proposed Rules would amend these superseded disclosure requirements to reflect, as applicable, the more recently updated requirements.
      • Examples:  The Proposed Rules would update references to auditing standards and make various other conforming changes that were required as a result of subsequent events but were not in fact made.  A discussion of these proposed amendments begins on page 121 of the Proposing Release.

Keith Higgins, director of the Division of Corporation Finance, stated that he does not believe that the Proposed Rules will significantly change what information is provided to investors, but noted that the public comment process will allow stakeholders to weigh in on this issue for each requirement discussed in the Proposing Release. 

With respect to overlapping requirements, the Staff noted that the streamlining of disclosure requirements would result in some relocation of disclosures within a filing.  The relocation of these disclosures may affect investors by changing the prominence and/or context of both the relocated disclosures and the remaining disclosures.  In addition, certain of the Proposed Rules would result in the relocation of disclosures from outside to inside the financial statements, subjecting this information to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, as applicable.  Moreover, the safe harbor under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) would not be available for such disclosures.  Conversely, relocation of disclosures from inside to outside the financial statements would have the opposite effect – namely, this information would not be subject to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, as applicable, while the safe harbor under the PSLRA would be available.  Furthermore, materiality and other thresholds applicable to disclosures may vary depending upon where the disclosure is included within a filing.  Discussion of these key disclosure location considerations begins on page 31 of the Proposing Release.

While the vote of the three Commissioners was unanimous, Commissioner Kara Stein expressed significant reservations about the complexity of the Proposing Release.  She expressed some skepticism whether investors would be able to comment in a meaningful way if the Proposing Release does not present the proposed changes in a manner that is accessible.  She also expressed some concern that some of the Proposing Release’s statements about the similarity between the Commission’s rules and the principles-based rules of GAAP were too conclusory.  Commissioner Stein said that she “begrudgingly” determined to vote in favor of the Proposing Release in order to give investors the opportunity to provide their input on the current disclosure regime.

The related press release and Fact Sheet are available here.  The public comment period will remain open for 60 days following publication of the Proposing Release in the Federal Register.

 

 ‭(Hidden)‬ Blog Tools


© Copyright 2018 Gibson, Dunn & Crutcher LLP.
Attorney Advertising. Prior results do not guarantee a similar outcome. All information provided on this site is for informational purposes only, does not constitute legal advice, is not confidential, and does not create an attorney-client relationship. Statements and content posted to this site do not represent the opinion of Gibson Dunn & Crutcher LLP ("Gibson Dunn"). Gibson Dunn makes no representations as to the accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors or omissions therein, nor for any losses, injuries, or damages arising from its display or use.