Thursday, August 11, 2016

NIRI urges SEC to focus on materiality of business and financial disclosure

By Jacquelyn Lumb

The National Investor Relations Institute urged the SEC to keep in mind Congress’s intent that disclosure reform of Regulation S-K should focus on the reduction of costs and burdens on issuers while still providing all material information. NIRI, which represents corporate officers and investor relations consultants, advised that many investors and issuers have complained that disclosure overload has become worse due to new disclosure mandates imposed by Congress. Some of these new reporting requirements have cost millions of dollars to implement while providing non-material information to investors. Fear of shareholder litigation also leads many companies to include generic or boilerplate risk factors, according to NIRI, and it remains in their filings for years. NIRI asked the SEC to consider the voluntary disclosure improvement efforts underway in response to investor demands before mandating any new disclosures.

Voluntary disclosures. Many companies no longer rely solely on their Exchange Act reports to provide information to analysts and investors. In addition to investor day events, non-deal roadshows, and industry conferences, NIRI noted that many companies have created websites to provide information about their operations, financial metrics, stock performance, and earnings guidance. Investor relations professionals seek feedback from investors, analysts and other stakeholders in order to refine their websites and presentations, according to NIRI.

Materiality. In NIRI’s view, the SEC should avoid any new market-wide disclosure requirements that do not meet the materiality standard outlined in the Supreme Court’s TSC Industries v. Northway decision. NIRI quoted Commissioner Michael Piwowar’s remark that this materiality standard is an objective legal standard rather than a subjective political one. The “reasonable investor” standard is well known and flexible enough to allow the SEC to provide new guidance as investor priorities change, according to NIRI, and it should continue to guide the SEC’s materiality determinations.

Company profiles. NIRI supports recommendations by Davis Polk and other commenters that the SEC should allow companies to create online business profiles for information that is unlikely to change from quarter to quarter, and provide annual updates. Companies then could provide shorter periodic reports that would focus on recent financial results, material changes to risk factors, and other new developments. This approach would allow for the elimination of Item 101(a), which requires a description of the general development of an issuer’s business over the past five years, NIRI explained.

Additional disclosure on the impact of environmental regulation should not be required since many companies already disclose pertinent information outside of their SEC reporting and they should retain that flexibility, NIRI wrote.

NIRI also urged the SEC to make clear that companies need only disclose industry and company-specific risks, with a safe harbor for the failure to disclose common risks. The SEC should eliminate the duplication of risk factors within periodic filings.

There is no consensus with respect to changing the quarterly frequency of financial reporting but NIRI said that most of its members do not favor a change in the rules, and believe the need for quarterly information may be greater for small or emerging issuers.

Use of technology. NIRI encouraged flexibility in issuers’ use of technology to improve the readability and navigability of their disclosures, including the use of cross references, incorporation by reference, and hyperlinks to reduce duplication and disclosure overload. The SEC should resist calls for an expansion of XBRL reporting requirements, in NIRI’s view, until it examines whether a significant number of investors use XBRL and whether the benefits outweigh the compliance costs.

NIRI listed a number of specific disclosure requirements that should be removed because they are duplicative or have become outdated, including the number of equity holders under Item 201(b)(1), supplemental financial information in Item 302, and the use of proceeds from registered securities in Item 701(f).