Based on feedback from the community, here’s a mix of a dozen things that are either surprising or scary about the SEC’s recent concept release on Regulation S-K:
1. How slow law firms were to write memos about it. For something this big, there normally is a rush to write. Perhaps it’s the daunting size of the thing – 341 pages. We’re posting memos in our “Regulation S-K” Practice Area (and our “Disclosure Effectiveness” Practice Area).
2. The sheer number of questions – with only a 90 day comment period. As Ning Chiu blogged, it appears there are 340 questions at first glance. But since each usually embeds at least two – and as many as five or six additional questions – there are more than 800 questions.
3. How many times the SEC indicates that additional disclosure might be necessary on a topic – so this reform project might result in more disclosure; not less. This is something that Corp Fin Director Keith Higgins has warned before – reducing volume of disclosure is not the sole end game of the disclosure effectiveness project, particularly given that many investors have expressed an appetite for more information.
4. Some of the risk factor questions are scary. This blog by Ning Chiu notes that the notion of requiring companies to discuss the probability of occurrence & the effect on performance for each risk factor is raised.
Another scary aspect would be imposing a numerical limit on the length or number of risk factors. That would be akin to Plain English Reform redux. Risk factors are included to mitigate liability. An issuer should have maximum flexibility to present risk factors as it deems appropriate.
5. Reconsidering the concept of quarterly reporting. The SEC inquires into the value of quarterly reporting & whether semi-annual reporting should be the standard, at least for some companies.
6. Importance of sustainability & public policy matters – including possibly requiring line-item specific environmental & social policy disclosures in periodic reports.
7. Stock buyback disclosures! Surprising because didn’t seem to fit in a S-K concept release is the brief mention on page 193 about whether disclosure about share repurchases should be required more frequently (FN 625 notes that Australia requires next-day disclosure). The possibility of a Section 13D/G-type reporting regime for issuer repurchases would probably be scary to whoever would have to deal with it. [Speaking of buybacks, don’t forget our webcast today: “Company Buybacks: Best Practices“]
8. One surprising thing is if the SEC actually allowed “external” hyperlinks in Edgar filings. Hyperlinking to other Edgar filings is one thing. But to allow external hyperlinks to website outside of Edgar would open a Pandora’s box. Particularly the prospect of a hacker using a external hyperlink to create a data security breach in the Edgar system.
9. Ways to enhance “readability.” Excellent! Usability makes it into the concept release! There’s also talk of increased use of summaries – aka as “layered disclosure.” See more in this blog.
10. Rather than asking about eliminating XBRL, the SEC asks whether other disclosures should be tagged in ways similar to XBRL (the SEC calls this “structured disclosure”). This article notes how the SEC – and investors – are using XBRL more these days.
11. The possibility of a “sunset” provision for a disclosure rule. The thought of having to revisit these disclosure standards (in another 341 page release?!?) every few years is frightening. In the disclosure community, the saying is that “sunshine is the best disinfectant.” To inject a “sunset” would create uncertainty.
12. Lack of a pervasive “re-imagining” of the disclosure system as a whole, such as the “company profile” approach that the SEC has floated before (see Cydney Posner’s blog). The concept release is more granular – and incredibly comprehensive.
How You Can Implement Disclosure Effectiveness Now
As Corp Fin Director Keith Higgins has repeatedly reminded us when he speaks, you can implement disclosure effectiveness now. You don’t need to wait for the multi-year process of getting this concept release to the proposal & adoption stages. By applying usability principles, you can reap the benefits of a shorter disclosure document today. When speaking, Keith gives the example of a company that came to talk to the SEC about making voluntary changes to it’s 10-K – which resulted in a document that was shorter by a third. But you don’t need to visit Corp Fin to accomplish this.
There are plenty of other examples. If you look at the proxy statements of major companies, many are pretty short. Amazon comes to mind – remember my short video about its proxy statement that was only 25 pages long! – but there are others. Some smaller companies are doing great jobs with their proxy too – see the summary for this proxy just filed by Consol Energy…
Poll: Will You Ever Read the S-K Concept Release?
Please participate in this anonymous poll:
– Broc Romanek