A House oversight panel grilled SEC Corporation Finance Director Keith Higgins on the SEC’s new initiative to completely review the mandated disclosure regime. Members of the Capital Markets Subcommittee, chaired by Rep. Scott Garrett, are intensely interested in the disclosure companies provide in financial statements and in the SEC’s study of disclosure regulation. Chairman Garrett praised the Commission for refocusing on the mandatory disclosure regime, adding that current disclosure is almost useless to many retail investors. He said that the SEC disclosure regime must be designed to provide material information to investors that is formatted to make it easier to read.
Robert Hurt (R-VA), the Subcommittee’s Vice Chair, emphasized that the SEC’s mission to facilitate capital formation must inform all aspects of the review of the disclosure regime. In that spirit, the Vice Chair urged the Commission to keep the needs and concerns of emerging growth companies in mind when examining financial statement disclosures. He specifically asked that emerging growth companies be exempted from having to use XBRL formatting, adding that XBRL is not ready for prime team. XBRL is part of the SEC disclosure regime, he reminded. He asked the Director the timeline and goal of the disclosure review.
Mr. Higgins replied that the Division has been tasked by SEC Chair Mary Jo White with preparing disclosure recommendations; and he expects that after that a release will be exposed to the public. The goal is to provide material and useful information to investors in order to properly inform their investment decisions, while at the same time being aware of the burdens on companies. At the end of the day, it is a balancing act in an effort to provide effective disclosure.
Both Rep. Hurt and Rep. Steve Stivers (R-OH) feared disclosure overload that can actually harm investors. Director Higgins affirmed that shareholders sometimes find more information useful and that some large financial institutions have asked for additional disclosure. He reaffirmed that it is a balancing act between more mandated disclosure and burdening companies.
Rep. David Scott (D-GA) strongly emphasized the need to coordinate cross-border Dodd-Frank derivatives disclosure rules with the CFTC and with global counterparts. In his view, the key to the cross-border harmonization of derivatives regulations is to ensure that the top 8 foreign jurisdictions in derivatives markets have robust disclosure regimes equal to the U.S, The SEC and CFTC must facilitate that, he said. He wants a report to Congress within 30 days when and if it is determined that one of these foreign derivatives regimes does not have an equivalently robust regime.
On the issue of proxy advisory firms, Chairman Garrett said that the SEC’s guidance is useful and, appropriately, in his view, effectively reduces the power of proxy advisors. He also noted that the guidance requires disclosure of conflicts of interest and the creation of a system to address conflicts of interest. Noting that it is important to get oversight of these firms, the Chair asked how the SEC intends to oversee the guidance. The Director replied that, while no formal monitoring process is in place, the Commission will monitor the market and will be receiving feedback from market participants, adding that there is currently a lull in the proxy season. Chairman Garrett asked if the Commission will issue a report on compliance with the guidance after the next proxy season. There are no current plans for such a report, said the Director, but the SEC will give it consideration.
The Chair asked if the SEC would consider amending the shareholder proposal rules to curtail abuse of the process by activist shareholders. The Director acknowledged that there is a lot of angst on the shareholder proposal process and that no one is totally happy with it. But the staff does not currently have a view on what or should be done. Any proposal to change the shareholder proposal process must have a consensus, he stressed.
Rep. Gary Peters (D-MI) mentioned his legislation, the Outsourcing Accountability Act, H.R. 790. which would require companies to annually disclose the total number of employees physically working in and domiciled in any country other than the United States. On a question from Rep. Peters, the Director said that the SEC would have the authority to implement the Act without further congressional action.
Representatives Bill Foster (D-IL) and Bill Huizenga (R-MI) are concerned about private companies in a supply chain to a public company being caught up in the Dodd-Frank mandated conflict minerals disclosure regime. While the regulations pertain to public companies, private companies in the supply chain could be forced to disclose the use of conflict minerals, Rep. Foster is concerned about what would constitute due diligence for private companies, for example, can they just take a supplier’s word for it. He requested that this be made part of the SEC’s disclosure review. The Director allowed that feedback during the disclosure review will help achieve better guidance on what constitutes due diligence.
Rep. Huizenga noted that the recent DC Circuit ruling added fog to the conflict minerals disclosure mandate. He emphasized that issuers need clarification, adding that reports are mixed on whether this well-intended statute is having its intended effect.