SEC Division of Corporate Finance Director Higgins Delivers Remarks on Disclosure Effectiveness (with Lofchie Comment)

In a speech at the American Bar Association Business Law Section Spring Meeting, SEC Division of Corporate Finance Director Keith F. Higgins discussed the SEC's disclosure regime and the ways in which the Commission is trying to increase disclosure effectiveness.

Director Higgins stated that the SEC's initial goal is to review specific sections of Regulation S-K and S-X to determine if the requirements can be updated to reduce the costs and burdens on companies, while also continuing to provide material information and eliminate duplicative disclosures. Director Higgins stated that the SEC is launching a spotlight page on sec.gov, where companies, investors, and other market participants will be encouraged to provide their views on how the SEC can make disclosure more effective.

According to Director Higgins, the SEC will prioritize the following in its review of disclosure requirements:

1. analyzing the business and financial disclosures that flow into periodic and current reports, namely Forms 10-K, 10-Q and 8-K;
2. evaluating whether Industry Guides and form-specific disclosure requirements should be updated and perhaps codified in Regulation S-K; and
3. examining whether disclosure requirements should be scaled for certain categories of issuers, such as smaller reporting companies or emerging growth companies.

He also suggested that in a later phase of the project, the SEC will look for ways to update and modernize disclosures that form the basis for most proxy disclosures.

Director Higgins further noted that the SEC is in the process of forming teams to review specific requirements in Regulation S-K and the Industry Guides. The teams are focusing on identifying redundancy or duplicative disclosures, and are expected to recommend whether its disclosure requirements might benefit from a broader principles-based approach (similar, he notes, to the SEC's current rules for Management's Discussion and Analysis ("MD&A")) or whether certain of its disclosure items are more likely to result in a laundry list of disclosures or a "check-the-box" approach to disclosure. Regulation S-X also will be an important part of the SEC's review, and the Commission will seek input to help determine how investors use these separate financial statements in their decision-making, how costly it is for companies to obtain them, and whether the benefits justify the challenges of presenting them.

Lofchie Comment: There is at least some irony in the SEC taking up this effort to reduce the costs of wasteful disclosures. After all, the SEC, as mandated by Dodd-Frank, imposed very significant and expensive disclosure requirements on issuers that have nothing to do with the purposes of issuer disclosure to investors or even the purposes of the SEC. See, for example, the Conflict Minerals Disclosure and/or CEO to Employee compensation ratio requirements. These mandates (i) drain the resources of the SEC (which is intended to benefit investors and capital growth), (ii) spend the money of shareholders (constituting a drag on employment), and (iii) are likely doomed to ineffectiveness. As to the CEO ratio requirement, a mandate meant to embarrass CEOs, it seems destined to prove the opposite of its intent. The likely consequence is that CEOs of profitable companies will receive higher bonuses, increasing the supposed pay disparity thereby demonstrating that higher pay disparity is related to better performance. As to the conflict minerals disclosure rule, please see the GAO report on this subject: SEC Conflict Minerals Rule (July 2012).Regarding the broad questions of SEC disclosure requirements, please see this speech by SEC Commissioner Daniel M. Gallagher.

See:Director Higgins' Speech.See also: SEC Page: Spotlight on Disclosure Effectiveness.