Mary Jo White Again Raises Issue of Disclosure Overload

By Cydney Posner

Expanding on the disclosure issues she addressed in her speech on SEC independence a couple of weeks ago (see my email of 10/4/13), SEC Chair Mary Jo White yesterday delivered a speech to the NACD (National Association of Corporate Directors) regarding "The Path Forward on Disclosure."

White observes first that the list of required topics for SEC disclosure has grown over the years, becoming "more and more specific and more and more detailed, not all of which has been a result of our rules or guidance we have provided." As a result, she believes there is a real potential for information overload, which can be detrimental to investors. In the JOBS Act, she notes, Congress provided the SEC with the opportunity to assess which changes in disclosure requirements should be made. Section 108 requires the SEC to analyze and report on how its disclosure regime could be modernized and simplified to reduce the costs and burdens for EGCs. White announced that the Corp Fin staff expects to make its report public very soon. But that review will be just a first step.

For White, this topic is an important priority and she clearly has been giving it some serious thought. Some of the questions she would like to address include the following:

• Whether there are specific disclosure requirements that are simply not necessary for or even wanted by investors.
• Whether the disclosure requirements are providing relevant information to investors in the most efficient manner or may be outdated. (For example, does the availability of historical stock price information online eliminate the need to include that information in a prospectus or annual report? Same for dilution disclosure or the ratio of earnings to fixed charges.)
• Whether sources other than the SEC contribute to potential disclosure overload, such as legislative mandates, investor demand or a company's decision to disclose more information to reduce litigation risk. More about this issue below.
• Whether there is repetition in filings that could be eliminated, such as disclosure regarding litigation that appears in Legal Proceedings, but also in Risk Factors, MD&A and the notes to the financial statements.
• Whether requirements for disclosure should be line item disclosures for certain topics or, instead employ a principles-based approach. For example, applying the basic standard of "materiality" and staff guidance, companies determine whether and to what extent disclosure regarding cybersecurity is required, depending on the severity and impact of any cybersecurity attacks.
• Whether disclosures should be more tailored to the industry in which the company operates, for example, by updating the SEC's Industry Guides.
• Whether investors are getting the information they need when they need it or whether their access to a company's disclosure could be improved. For example, many rely on social media and also expect to have information pushed to their computers and smartphones almost instantaneously. Should SEC disclosure continue to be treated differently? Are the current timeframes appropriate for investors or would shorter timeframes impose an undue burden on companies and potentially lead to a decrease in quality?

With regard to information overload resulting from sources outside the SEC, White points to the lengthy "Risk Factors" that she maintains developed as a consequence of adoption of the PSLRA safe harbor. The PSLRA encouraged companies to share more "soft" forward-looking information if it was accompanied by appropriate cautionary language. She maintains that, before 1995, risk factor disclosure was typically only provided in offering documents for higher-risk companies. (Some might argue that it was fairly widespread even before then.) She contends that this cautionary language became more extensive, "not necessarily because of a change in the SEC requirements for risk factor disclosure (although it is now required in the 10-K) but, at least in part, because of legal advice from attorneys assisting with the preparation of filings. It may be difficult or unwise to significantly walk those disclosures back, but it is fair to ask whether there is more there than is really needed. And, if this is not the result of an SEC or Congressional mandate, then it is worth asking what might be done if companies strive to reduce the length of these provisions on their own? These are among the issues that should be considered." Executive compensation disclosure has likewise grown dramatically. White attributes part of this increase, not to new disclosure mandates, but rather to the efforts of companies "trying to do a better job of explaining the rationale for the compensation packages they pay executives because they now must provide investors with an advisory vote on executive compensation…." While "we think these additional disclosures are a good thing, … we should be careful not to have too much of a good thing."

One very interesting possibility that White raises is a "filing and delivery framework based on the nature and frequency of the disclosures, including a ‘core document' or ‘company profile' with information that changes infrequently. Companies could then be required to update the core filings with information about securities offerings, financial statements, and significant events."

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