December 30, 2016

Disclosure Reform: How Should Companies Make Disclosure Available?

Way back before the SEC started putting out concept releases related to its disclosure effectiveness project, I blogged a few times about disclosure reform (& I was recently interviewed about the topic in this MergerMarket report). I like some of the ideas that SEC Commissioner Kara Stein laid out in this speech earlier this year.

I now tackle how companies should make the disclosure available. Obviously, companies can make disclosure available through SEC filings – a topic that is covered in the next item below. But companies make disclosure available outside of their SEC reporting stream:

This is a tougher topic than it might seem – even though we really are working off a clean slate. There is minimal regulation of IR web pages, social media channels, etc. Other than a few requirements (eg. breaking out Section 16 reports on a SEC filing stream), companies have great liberty on how they make information available.

Should this change? I do believe companies should continue to have great liberty. But I also believe there needs to be a bare minimum as the quality of what companies are doing varies greatly. And many companies are near the bottom of the barrel.

One argument that I have heard is that “investors rarely bother looking at my IR web page, so why should I care?” I have two answers for that – one reason they might not be looking is because you don’t care and there’s nothing there. The bigger answer is that if disclosure reform is successful and companies do start disclosing more meaningful information, then investors will care more about how you make it available.

So what do I mean about bare minimum? I’m thinking out loud here – but I do think the minimum needs to apply to more than just the IR web pages. I think that once a social media channel becomes mainstream, then companies should be under an obligation to deliver information via that channel. This is akin to the listing standards for the stock exchanges requiring a press release. It all boils down to how investors expect information to be delivered. Let me know what you think.

Disclosure Reform: How Should Companies “File” Disclosure?

In what ways should companies “file” their disclosure so that investors can rest assured that it really is the company that made the disclosure? And perhaps this is also necessary for liability purposes?

I do think Edgar is necessary. There needs to be a well-known repository of information that investors can feel comfortable as being trustworthy. Edgar certainly is branded by now and it wouldn’t make sense to change its name or purpose. However, it does make sense to reconsider how disclosure filings are displayed. The suggestions that have been bandied about for some time make sense to seriously consider – e.g., requiring companies to file a “core” disclosure or “company profile” document with information that changes infrequently, supplemented by periodic and current disclosure filings with information that changes from period to period. In addition, there would be transactional filings that have information relating to specific offerings or shareholder solicitations.

And then there is my pet peeve about form labels and how confusing they must be for retail investors. How does a small investor know that – when they search Edgar – a proxy statement is called a “DEF 14A”? The nomenclature on Edgar should change sooner rather than later…

More on “Disclosure Reform: What Do Investors Want?”

Joe Hall of Davis Polk responded to my blog about what investors want by noting:

I think the most important point is the one you get to in the second post. The series of questions I would ask is, who is the investor we are writing for? What are the needs of that particular investor? What does that investor need to be informed about and what do we not need to bother with?

Lawyers who write disclosure, much less company officers who write disclosure, never really focus on this question and it’s because to the extent the SEC has addressed it, they have come up with things like the plain English rules that suggest we are communicating to readers with a ninth grade education and no discernible quantitative skills. And of course court decisions focus on the “reasonable investor” who does not exist.

We don’t really know who to write for because the SEC has never done any studies to find out who reads company disclosures. But ask yourself how likely it is that retail investors get any information at all from 34 Act or 33 Act filings. I would be it is between zero and something less than 1%. Probably why the SEC studiously avoids the question. And I completely agree with your critique of EDGAR. It’s a joke to think that a novice could find anything on it.

What if companies were told to assume their investor was a college educated securities industry professional with several years experience reviewing company disclosures? There are some simple implications to this – e.g. you would lose half of your risk factors and forward looking statement boilerplate and the ones that remain would be the ones that are actually relevant (no more “We are exposed to competition” . . . “If we lose access to capital this could have an adverse effect on our result of operations and financial condition”…”We depend on our chief executive officer”…). But this sort of instruction would also force CFOs and IR folk to think about what analysts really want to know – and they know what this is! They talk to them at least quarterly!

Analysts – and anyone who invests – want to know about the future, not the past. No one really cares how a pre-IPO company priced its options (except to the extent it reveals how willing to play fast and loose management is), and few care about things like dilution, endless product descriptions, “compensation philosophy” etc. They are often interested in company specific things that aren’t covered in S-K line item requirements. What’s your utilization ratio? How much are you going to have to spend to complete that new mine? How will that new product work on a mobile platform? The staff would still be able to review and comment on a filing – all they would have to do is listen to the company’s earnings call and see whether the company’s disclosures are addressing the questions on analyst’s minds.

Broc Romanek