Thursday, September 08, 2016

New York City’s Bar recommends disclosure improvements under Reg. S-K

By Jacquelyn Lumb

The Financial Reporting Committee of the Association of the Bar of the City of New York addressed a number of topics in response to the SEC’s request for comments on the disclosure requirements under Regulation S-K. In its August 30 comment letter, the committee focused on the audience for Reg. S-K disclosure, MD&A, the presentation and delivery of important information, and the use of a company profile disclosure model. The comment period closed July 21, 2016.

Opposition to tiered disclosure. The committee urged the SEC not to adopt tiered disclosure based on differing levels of sophistication and industry knowledge but, instead, through its rulemaking and comment process to encourage clear and plain English disclosure. In the committee’s view, effective disclosure for the most sophisticated analyst does not have to be incomprehensible to individual investors who lack particular industry knowledge.

Management overview. The committee continues to support its earlier proposal that the SEC adopt a rule to require registrants to provide an overview of the past year and their expectations and concerns in the year to come. The SEC should encourage companies to communicate the information in a plain English manner similar to how a CEO might report to the board of directors. This disclosure would not substitute for the more detailed financial and business information required by Reg. S-K, but would allow management to exercise judgment in presenting an overview of where the company has been and where it is going, the committee explained.

Cross-referencing and hyperlinks. The presentation and delivery of information is one of the most important to address and one of the easiest to improve, in the committee’s view, first by encouraging cross-referencing and hyperlinks to reduce duplicative disclosure. For example, the committee suggested cross-referencing from MD&A to the financial statement disclosures about critical accounting policies and recently issued accounting pronouncements. The committee acknowledged the challenges relating to external hyperlinks, including the auditor’s responsibility to review information outside of the financial statements, but urged the SEC to encourage hyperlinks within filings to the extent possible.

Improve EDGAR formatting. Another recommendation was to improve the formatting of documents in the EDGAR system. The expensive print-ready format many companies pay to produce, once “EDGARized,” is far less user friendly. The formatting in EDGAR should be modernized, according to the committee, but until that is completed, the SEC should adopt a rule to require that print-ready, non-EDGARized pdf versions of documents be filed with the EDGAR versions. The committee noted that Canada’s filing system permits filings in pdf form.

Company profiles. The committee urged the SEC to seriously consider the company profile disclosure model under which certain information would be kept on a website and updated periodically. The information could be part of the EDGAR system or a company website and would include governance documents, material contracts, executive compensation-related documents, effective registration statements, and ownership-related documents such as Forms 13D and 13G, among other relevant categories.

As a subsequent step, the committee said the SEC could consider identifying information in Forms 10-K and 10-Q, such as the business and risk factors section, to include in the profile. The use of a company profile model would reduce the burden on companies and benefit investors by shortening the length of periodic reporting documents, the committee explained.

The committee added that it is not suggesting a continuous disclosure approach, but one where companies would update information on the same time schedule as that required for their periodic filings.

Shearman & Sterling. The New York office of Shearman & Sterling also weighed in on what it sees as the most significant issues raised in the concept release, including the appropriate level of investor sophistication at whom disclosure should be aimed, and whether to mandate disclosure regarding environmental, social, and governance issues (ESG).

Level of sophistication. With respect to investor sophistication, the firm expressed concern that many issuers believe they have to frame their disclosure for the least sophisticated investors, but most of the users of this disclosure are institutional investors, professional investment managers, and research analysts. Individual investors are more likely to rely on third parties to analyze the disclosure, according to the firm, and the SEC should recognize the level of sophistication of the main users of these filings in drafting any reforms.

ESG disclosures. As for ESG disclosures, the firm said the focus should remain on material financial and business information necessary for voting and investment decisions. ESG disclosures should not become a mandated general disclosure practice, in the firm’s view. Shareholders have legitimate reasons to be interested in ESG disclosures, but the firm pointed to existing methods to engage on these issues, including shareholder proposals and direct engagement with management.