In a speech delivered yesterday at the Texas A&M Corporate Law Symposium, SEC Chairman Paul Atkins provided some details about the kind of disclosure reforms he wants the agency to pursue. I’m going to take these one-by-one and try to summarize the key points Chairman Atkins raised during his remarks. But he had quite a bit to say, and you should definitely read his speech in its entirety. Anyway, let’s get started.

Executive Comp Disclosure.  Chairman Atkins said that the three principles driving the SEC’s efforts to reform executive comp disclosures were rationalizing, simplifying and modernizing the rules governing those disclosure requirements. In terms of rationalizing the rules, he said that materiality should be the SEC’s “north star,” and stated that the current requirement to provide detailed compensation information for up to seven people isn’t consistent with that objective. He said that he agreed with commenters who said that the number of executives for whom compensation info is required should be reconsidered, and that the level of disclosure should be calibrated with its cost.

Chairman Atkins singled out the PvP disclosure rules when discussing the need to simplify compensation disclosures. He said that SEC disclosure requirements should be “intelligible by a reasonable investor and practical for a company to comply [with], without the need for a cottage industry of ultra specialized consultants,” and that the current PvP disclosure rules flunked this test.

With respect to the need to modernize comp disclosures, the Chairman called out the current treatment of executive security arrangements as a “perk.” He pointed out that we live in a different world than the one 20 years ago when the SEC decided that executive security arrangements were not “integrally and directly related to job requirements,” and that the SEC’s rules needed to keep up with modern business realities.

Regulation S-K. Chairman Atkins called out “disclose or comply” line items that indirectly compel companies to toe the line on specific governance practices by forcing them into awkward disclosures if they don’t. He cited some of Item 407’s requirements, such as the need for a company without a nominating or compensation committee to explain why that structure is appropriate, as examples of this kind of “shaming disclosure.”

Chairman Atkins characterized these requirements as an “attempt to indirectly regulate, or set expectations for, matters of corporate governance.” He said that absent a Congressional mandate, it wasn’t the SEC’s role to enforce evolving “best practice” governance standards through disclosure requirements.

Chairman Atkins also cited provisions of Reg S-K that forced companies to comply with impractical disclosure requirements, such as the need to track down beneficial ownership information for NEOs who departed during the prior year in order to complete the current year’s beneficial ownership table in the proxy statement required by Item 403. He also cited the broad definition of “immediate family members” used in Item 404’s related party transactions disclosure requirements as imposing potentially impractical obligations on public companies.

Risk Factors. The final disclosure reform topic that Chairman Atkins addressed was the need to curb the relentless expansion of risk factor disclosures. He suggested that the solution depends on whether one views risk factor disclosure as primarily a tool to communicate what management believes are the material risks facing the business to investors, or a means to establish litigation defenses.

If the former, Chairman Atkins suggested that one approach might be for the SEC or the company itself to “maintain a set of risks, which could be published separately outside of the annual report, that broadly apply to most companies across most industries,” which would serve as a sort of “general terms and conditions” for investments. If the latter, then he suggested the solution might lie in adopting a safe harbor “stating that failure to disclose impacts from publicized events that are reasonably likely to affect most companies” won’t create liability under the securities laws.

My guess is that we shouldn’t read the Chairman’s comments on these topics in isolation. For example, the principles of rationalizing, simplifying & modernizing disclosure requirements likely have application to the SEC’s review of Reg S-K line items beyond Item 402. Similarly, Item 407 isn’t the only S-K line item that involves potential “shaming disclosures” (Items 405 and 408 comes to mind). Some of those line items may also get a close look from the SEC, although they may have policy justifications that don’t involve pushing governance “best practices.”

As for the ever-expanding length of risk factor disclosures, I’m not sure there’s a comprehensive fix to this problem.  The SEC can only protect companies from liability under the securities laws, and unfortunately, that’s not the only source of potential disclosure-related claims public companies might face.

Chairman Atkins also gave a shoutout to Texas for its recent legislative efforts at corporate reform, and for its enactment of SB 29 in particular. Among other things, that statute allows Texas corporations to include jury waivers and exclusive forum provisions in their charter documents.

– John Jenkins