By Jacquelyn Lumb
The Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) has written to the SEC in general support of three of its rule proposals: disclosure update and simplification; Regulation S-K Subpart 400; and exhibit hyperlinks and html format. In its October 27 letter, CCMC expressed concern that the U.S. today has less than half the number of public companies that it did in 1996 and the number has gone down in 19 of the last 20 years. In CCMC’s view, a less complex, more predictable regulatory environment would promote more public listings. CCMC added that the guiding principle for public company disclosure must remain materiality as viewed by a reasonable investor.
Potential unintended consequences. CCMC supports the SEC’s objective of streamlining the disclosure requirements and eliminating redundancies, but raised concerns that some currently overlapping information may be moved from management’s discussion and analysis to the financial statements and accompanying footnotes, which could create audit requirements where they did not exist before. It also could subject the information to additional internal control requirements, or to the rules for tagging the information in XBRL. By moving information to the financial statement footnotes, CCMC warned that the forward-looking safe harbor may be lost, which may lead issuers to disclose less information. CCMC suggested that the SEC conduct more analysis and outreach, particularly to the accounting and legal professions, before moving forward in this area.
Materiality as conceived by the Supreme Court. CCMC does not favor bright line thresholds or special materiality tests for individual items under Regulation S-K and urged the SEC instead to require only disclosure that would significantly alter the total mix of information to a reasonable investor, as established by the Supreme Court in TSC Industries v. Northway and Basic Inc. v. Levinson.
FASB/GAAP redundancies. CCMC said it is critical that the SEC and FASB clearly convey the principle that interim disclosures should only be made if they significantly update year-end information. CCMC also stressed that financial statements should only contain information that is material to investors and to a significant number of reporting entities, and commended the SEC for coordinating with FASB to eliminate redundancy between U.S. GAAP and Regulation S-K. The SEC should coordinate with FASB to ensure that situations that require forward-looking information have the benefit of the safe harbor, according to CCMC.
Subpart 400. With respect to Subpart 400 of Regulation S-K, CCMC does not believe that Item 401 needs any further revisions since the SEC expanded the disclosure requirements in 2009 to include the qualifications of directors and an expanded list of legal proceedings, among other things.
The SEC also rewrote the disclosure rules on executive compensation in 2006 to include compensation discussion and analysis under Item 402. The CD&A has come under considerable criticism, according to CCMC, making it ripe for reform. One approach to consider is to eliminate the compensation tables other than the summary compensation table, since they have created a great deal of confusion. CCMC also urged the SEC to revisit the way equity award grants and cash compensation are reported.
The materiality threshold for reporting related transactions was last updated in 2006, CCMC noted, so it should be revisited. CCMC suggested that rather than a quantitative threshold, the SEC require only the disclosure of material related party transactions or the use a scaled approach such as a percentage of total assets to determine the reporting requirement.
Given the amount of scrutiny and modification to the Item 407 corporate governance disclosure, CCMC urged the SEC to focus on other areas in greater need of reform.
Hyperlinks. CCMC supports the proposal on hyperlinks for exhibits on a going forward basis but finds the language in proposed Rule 105(c) too broad since, read literally, it would extend civil liability and antifraud liability to any third-party websites that are hyperlinked. The SEC should clarify the scope of the rule before it is finalized, in CCMC’s view. CCMC also asked the SEC to grant smaller reporting companies and non-accelerated filers an additional year beyond the date for accelerated filers to allow time for them to comply and to take advantage of any technological enhancements the larger companies develop during this period.
No nods to special interests. In closing, CCMC urged the SEC not to use mandated disclosure rules to further social, cultural, pecuniary, or political motivations that the federal securities laws were not designed to advance. The disclosure regime should not be an avenue for special interests to impose their agenda on other shareholders, CCMC advised.