Higgins Frames SEC’s Disclosure Project

by Edith Orenstein

In remarks before an American Bar Association gathering, SEC Division of Corporation Finance Director Keith F. Higgins appeared to formally kick-off the SEC’s disclosure effectiveness project.

“I would be hard-pressed to find a better group with whom to start our current discussion about the ways to improve disclosure than the Federal Regulation of Securities Committee of the American Bar Association,” Higgins said.

Higgins’ description of Corp Fin’s plans for addressing disclosure reform was outlined at a level of detail that went beyond previous remarks on this subject by SEC Chairman Mary Jo White, and Chief Accountant Paul Beswick. Although Higgins’ April 11 speech to the ABA is similar to his remarks at PLI’s SEC Speaks conference on Feb. 22, 2014, the availability of his most recent speech on the SEC website, and his announcement last week of the launch of a new SEC web portal or “spotlight” page on the Disclosure Effectiveness Project, give me the impression that this speech marks the formal launch of the SEC’s disclosure effectiveness project.

Indeed, it was just a couple of months ago at the PLI SEC Speaks conference, that former SEC Commissioner Ed Fleischman asked rhetorically “What recommendations?” were contained in the 100+ page SEC staff report issued on Dec. 13, 2013, in response to the Congressionally mandated request for such a report, on: Report on Review of Disclosure Requirements in Regulation S-K. That report concluded further work would be necessary, in that the SEC should conduct a comprehensive review of the disclosure regime to develop comprehensive and targeted recommendations for improvements.

Describing Corp Fin’s planned approach to the SEC’s Disclosure Effectiveness project, Higgins said the commission’s 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 continuing to provide material information and eliminate duplicative disclosures.

He said Corp Fin is looking for ways it can streamline the disclosure process, but may  recommend new disclosure requirements if it identify potential gaps in disclosure or opportunities to increase the transparency of information.

“You may be surprised to learn that there are many investors who have expressed an appetite for more information, not less,” he said.

Higgins said Corp Fin will initially focusing on the business and financial disclosures that flow into periodic and current reports such as Forms 10-K, 10-Q and 8-K. They will evaluate whether Industry Guides and form-specific disclosure requirements should be updated and perhaps codified in Regulation S-K.

Another area will consider whether disclosure requirements should be scaled for certain categories of issuers, such as smaller or emerging growth companies. In a later phase of the project, Corp Fin will consider ways to update and modernize disclosures that form the basis for most proxy disclosure.

Higgins Says Act Now

Higgins implored his audience of attorneys, many of whom work as corporate or outside counsel for public company issuers, to have their companies or clients take action now. He says issues have many options available under the current securities law regime to simplify and eliminate duplicative disclosure, and to make their disclosures more transparent and effective.

Here are Higgins recommendations:

  1. Reduce Repetition
  2. Focus Your Disclosure
  3. Eliminate Outdated Information.
On the last point, Higgins cited statistics from a report published by FEI’s research affiliate, the Financial Executives Research Foundation (FERF) with KPMG, Disclosure Overload and Complexity: Hidden in Plain Sight.

The Final Word?

Related projects have been underway at FASB and IASB for a couple of years, under the moniker of disclosure “framework” initiatives. Those projects have a shared goals of making disclosures more useful (or, in the SEC’s words, more “effective”) for investors and users of financial reporting. Additionally, the projects have the shared goal of eliminating needless, duplicative, or confusing disclosure.

Placed on top (or to some, as a fundamental baseline) is a cost-benefit consideration. Some readers may remember a movie that said “Grease” is the word; when it comes to looking at the usefulness or effectiveness of disclosure, a “holistic” or “integrated” approach may be the word.