Disclosure Overload? Maybe Time to Rethink the Framework
Last week, SEC Commissioner Troy Paredes - whose term expires in June - delivered this interesting speech about the need to reform the SEC's disclosure framework. A lot of good stuff in there. Much of it has been said before (Troy himself gave a speech on the same topic a few years back - and remember the dead-soon-after-conceived "21st Century Disclosure" project) - but it's important to keep the eye on the ball and recognize the world has changed, but that the way disclosures are made has not all that much (despite the forceful period of change we have been through the past decade). Here is my ten cents off literally off the top of my head:
- Hard to live in DC right now and not think about "sequester, sequester, sequester." Which leads to my point of how will the SEC have the horses to do something of this magnitude given its resource level, lack of support from Congress, way-behind rulemakings and larger priorities (see this farewell speech by OIA Director Ethiopis Tafara about conflicts between market participants).
- Although I agree that more disclosure is not always better than less, the beauty of the Web is that fulsome disclosure can always be posted online and then investors can decide which disclosures are the most meaningful for them.
- It will be hard to convince companies to pare down sections such as "Risk Factors," since SEC filings principally remain compliance documents. The linchpin of reducing volume is how does one devise a framework that continues to protect companies that make less disclosure?
- Of course, the biggest challenge is how to address the need to draw out more meaningful disclosures - forward-looking ones - in this era of increasing proxy disclosure litigation. Good luck with that.
- Disclosure lawyers are supposed to be experts in disclosure; yet few even know what "usability" means. That has to change and fast.
- The SEC has to look in the mirror first. Too many rules - and guidance - are not written in plain English. And the easiest fix is to tweak Edgar - change the labels for filings so they match what they are rather than the ancient symbols still used (eg. DEF 14A - what does that mean to the average investor?).
Coming Soon: SEC Staff Paper on Accounting Disclosures & Disclosure Roundtable
Among detailed notes from the accounting panels during PLI's recent "SEC Speaks" conference, here's an excerpt from Edith Orenstein in FEI's "Financial Reporting Blog":
During a lively panel on Day 2 of PLI's "SEC Speaks" conference, SEC Chief Accountant Paul Beswick announced that a Staff Paper on Disclosures is expected in the "next couple of months" and a related Disclosure Roundtable is expected to be held in the "late spring or early summer." Forward-Looking Disclosures and the 'Dividing Line' Between MD&A and Footnotes Beswick noted that in the past few years, the FASB has been working on three projects relating to disclosures:
- Going concern
- Liquidity and interest rate disclosures
- Disclosure framework
One thing the FASB has received feedback on, said Beswick, is an apparent "increasing frequency of frequency of things traditionally housed in MD&A, and moving them to disclosures." [Note: See, e.g. FASB, CAQ Issue Summary of Disclosure Forums, and see Comment Letters received by FASB on its Invitation to Comment on the Disclosure Framework.]
Beswick explained that the SEC staff is working on a paper about "what is the dividing line;" e.g., he said, "One of the things we are looking at is: [feedback saying that] "you are pulling too much forward- looking information from MD&A into disclosures." He added, "We think the paper is important because we think you need a level set [of information]."
"I am hopeful the staff paper will be out in the next couple months," said Beswick, "with the goal of having the disclosure roundtable in the late spring or early summer."
As previously referenced by Beswick at the Dec. 2012 AICPA National Conference on Current SEC and PCAOB Developments, the topic of disclosures involves not only geography within the entire "financial reporting package" but also legal liability, auditor/auditing considerations, and the "disclosure framework" generally (a project the FASB is currently working on); therefore, the SEC will engage with the FASB and PCAOB on this project as well.
Transcript: "Activist Profiles and Playbooks"
We have posted the DealLawyers.com transcript of our recent webcast: "Activist Profiles and Playbooks."
- Broc Romanek