Statement at an Open Meeting on Regulation S-K Concept Release

Good Morning.  This is an open meeting of the U.S. Securities and Exchange Commission on April 13, 2016, under the Government in the Sunshine Act.

Today, the Commission will consider two separate recommendations from the staff.  First, we will consider and vote on a recommendation from the Division of Corporation Finance to issue, as another important step in its disclosure effectiveness review, a concept release on modernizing certain business and financial disclosures required by Regulation S-K.  Second, we will consider and vote on a recommendation from the Division of Trading and Markets to adopt final rules for the business conduct standards of security-based swap dealers and major security-based swap participants, rules essential to completing our regulatory regime under Title VII of the Dodd-Frank Act.  I will discuss the recommendations in the order they will be presented, turning first to the recommendation from the Division of Corporation Finance.

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Regulation S-K Concept Release

The SEC’s disclosure regime is central to our mission to protect investors and the integrity of our capital markets.  Since 1934, our disclosure requirements have been designed to foster transparency, honesty, and confidence in the markets so that investors can make informed investment and voting decisions and companies can appropriately access the capital they need.  In the modern era, Regulation S-K has become the key tool for furthering these goals and is a central repository for the Commission’s rules covering the business and financial information that companies must provide in their filings, including information describing a company’s business, risks that the company faces, and management’s discussion and analysis of a company’s financial condition and results of operations. 

The Disclosure Effectiveness Review

Because of its critical importance to investors and issuers, optimizing Regulation S-K, and our disclosure regime more broadly, is a crucial ongoing responsibility of the Commission and the staff.  On several occasions, the Commission and its staff have undertaken an assessment of whether our disclosure requirements continue to provide investors with the information they need to make informed investment and voting decisions.  Some of these earlier efforts have focused on modernizing or simplifying disclosure requirements.[1]  Other initiatives have addressed specific features of disclosure and produced significant changes to our regulations, such as the changes made in 2005 to the securities offering process[2] or those made in 2002 to accelerate periodic reporting.[3]  All of these efforts have contributed to shaping our current system and requirements.

The concept release we are considering today is a foundational product of the staff’s Disclosure Effectiveness initiative, a multi-faceted effort that began in late 2013 with a staff report to Congress, mandated by the JOBS Act, on how to update and modernize our disclosure requirements.  After the report was completed, I directed the staff to do an in-depth review of Regulations S-K and S-X to consider ways to improve our disclosure requirements for both investors and companies.  We want to make sure that our rules are facilitating both timely, material disclosure by companies and shareholders’ access to that information.  And we want to make sure that our requirements are as efficient as they can be.

The Commission’s initial action in this review came in September of last year, when we published a Request for Comment on the effectiveness of certain financial disclosure requirements in Regulation S-X,[4] which governs the form and content of financial statements to be included in filings with the Commission.  The request focused on the requirements for financial disclosures that companies must file about acquired businesses, affiliated entities, guarantors, and issuers of guaranteed securities.  We have received a number of comments on this request, which the staff is considering as it develops rulemaking recommendations for the Commission.

Today’s recommendation is focused on the business and financial disclosures required by Regulation S-K in companies’ periodic reports, as well as on the optimal manner of providing these disclosures to investors.  As it proceeds, the staff’s review of disclosure effectiveness will also encompass a consideration of the compensation and governance information required in proxy statements, which may result in future requests for input or recommendations.  The staff is proceeding systematically through the disclosure regime, considering the entire regime while dividing the work into logical components that can be readily understood and addressed by the full range of interested parties.

Current Areas of Focus in Regulation S-K

Today’s recommendation analyzes evolving business models, advancements in technology, and ongoing public dialogue on disclosure issues and seeks public input on how our business and financial disclosure requirements in Regulation S-K can best be modernized in the current context.  As I have said before, I believe it is best to leave to the expertise of the Commission and its staff how best to deploy our disclosure authority,[5] but we draw on wide-ranging input from all stakeholders on how we should do so.  This concept release does just that.  It considers the history and purpose of the disclosure requirements, and it establishes an accessible and thoughtful framework for better understanding companies’ and investors’ experiences with the requirements and whether investors are receiving the information they need.  And it seeks broad input from all constituencies.

The threshold questions, in reviewing existing disclosure requirements for their effectiveness, are: What should be kept, modified, eliminated, added to?  And, do the current requirements provide for the most efficient and effective means of disclosing the required information?  In reviewing these core questions, the concept release includes questions drawing on public dialogue about other potential subjects for additional “line-item” disclosures.  For example, the concept release considers the increasing attention paid to sustainability matters by various constituencies, including some investors and issuers.  Many companies have been engaging with investors on these topics and voluntarily providing reports[6] outside of their Commission filings and beyond what is currently required under the federal securities laws or our rules.  Engagement with investors on disclosure – not to mention a wide range of other issues – is essential, and I strongly encourage further dialogue as the staff’s review progresses. 

In addressing these questions and others, the concept release takes a broad, “step‑back” look at how we can make our disclosure regime better and more useful in 2016 and beyond.  Our disclosure framework, both historically and currently, is largely principles-based and rests on the fundamental tenet of materiality, which the Supreme Court[7] and the Commission[8] have stated centers on whether there is a substantial likelihood that a reasonable shareholder would consider certain information important to decision‑making as an investor.  As Justice Thurgood Marshall, writing for the Court in TSC Industries v. Northway, put it: “[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available,”[9] recognizing that setting a materiality standard unnecessarily low could cause management to “bury the shareholders in an avalanche of trivial information.”[10]  I believe those fundamental principles have served investors and our markets well, but the concept release invites further consideration of whether the “lines” are appropriately drawn for investors and issuers today.  And,  in conducting their review, the staff is sensitive to both the concerns of various shareholders that they generally want more, not less, information, and to companies’ concerns about requiring unnecessary, immaterial disclosures.

Another critical element of effective disclosure is its presentation and delivery.  The concept release seeks input on how we could improve the readability and navigability of information because, while optimal content and scope requirements obviously are critical, they mean very little if the information provided is not reviewed or understood.  We need to take account of how various investors actually interact with companies’ disclosures, what matters most to them, and what methods of delivery enhance the accessibility and intelligibility of the information provided.  The concept release thus poses a range of questions, for example, about cross-referencing, hyperlinks, structured data, incorporation by reference, layered disclosure, and the use of company websites. 

In addition to broadly seeking input on the range of such options, we are also moving forward on other, disclosure-related technology projects.  The staff, for example, is preparing recommendations for a rule proposal for the Commission’s consideration to allow companies to file financial statements in inline XBRL, rather than as a separate exhibit to their annual and periodic reports, which has the potential to improve the quality of the structured data that is filed and investors’ access to the information.  We are also furthering efforts to modernize our EDGAR system by improving the machine-readability of forms and filings.  And when we adopt new requirements under our rules now, we are assessing not only whether the information is needed for informed decisions by investors, but also whether the information can be usefully structured – including, among recent examples, in executive compensation proposals and new disclosure requirements for asset-backed securities.  Because of the importance and nature of these “manner of delivery” issues, I have asked the Division of Corporation Finance, as part of the disclosure effectiveness review, to form a dedicated working group to address these issues and to include staff from OIT, DERA and the Office of the Investor Advocate.

The work of disclosure effectiveness obviously does not stop with this release.  The staff is continuing to develop recommendations to update and enhance the range of our requirements, with workstreams on potential updates to industry guides – in particular, Guide 3 and Guide 7, which cover disclosures in the banking and mining industries – among others, and potential rule amendments to reduce various duplicative, overlapping, outdated or unnecessary disclosures.  So stay tuned.

Good disclosure benefits everyone—investors, companies, and the markets generally.  And everyone has a strong interest in it.  I am encouraged that as the staff was developing its recommendations, many companies took a fresh look at their own disclosures to see how they could make improvements in advance of any action on our part.  And they have engaged with investors, recognizing that investors are the ultimate consumers of companies’ disclosures and the primary beneficiaries of improvements.  I encourage investors to continue to engage with companies on disclosure and to respond to our requests for comment in this concept release.  Broad input is essential, as effective disclosure depends on the trust and support of a wide range of stakeholders, most significantly the investors and issuers that the system is designed to serve.

Before I turn the proceedings over to Keith Higgins, the Director of the Division of Corporation Finance to discuss the concept release, I would like to thank the staff for their hard, thorough and very careful and balanced work on this release. 

Specifically, I would like to thank Keith, Karen Garnett, Angie Kim, Raquel Fox, Lisa Kohl, Amy Reischauer, Brian Soares, Charlie Guidry, Ada Sarmento, Peggy Kim, Ji Shin, David Korvin, Sean Harrison, Anuja Majmudar, Frank Pigott, Nolan McWilliams, Donald Field, Jamie Kessel, Mitchell Austin, Nili Shah, Todd Hardiman, Lindsay McCord, Ryan Milne, Kevin L. Vaughn, Jessica Barberich, Stephanie Sullivan, Paul Dudek and Ellie Quarles in the Division of Corporation Finance.  Annie Small, Bryant Morris and Connor Raso in the Office of General Counsel; Mark Flannery, Vanessa Countryman, Simona Mola-Yost, Mike Willis, Tara Bhandari, Helen Zhang and Jennifer Bethel in the Division of Economic and Risk Analysis; and Jim Schnurr, Wes Bricker, Brian Croteau, Courtney Sachtlenben, Jeff Minton and Duc Dang in the Office of the Chief Accountant.  I also would like to thank my fellow Commissioners and their counsels for their productive input on this release.

Now, I will turn the meeting over to Keith Higgins for the staff’s recommendation.