From: Robert E. Rutkowski
Brent J. Fields, Secretary
For the reasons below, I urge the Commission to withdraw the proposed rule and reconsider its provisions to ensure that any changes to the Commission’s disclosure rules do not narrow the scope of information that is provided to investors.
If adopted, the Commission’s proposed rule will eliminate certain disclosure requirements that purportedly are redundant, overlapping, outdated or superseded by other disclosure requirements. As a general matter, I note that repetitive disclosures are not a significant concern for investors. Investors focus on disclosures that they believe are material. But because investment strategies differ, investors will disagree on which disclosures are material. On the other hand, it will be of great concern to investors if material information is no longer disclosed. The overwhelming consensus of investors is that more information should be disclosed, not less.
While the proposed rule is presented as a technical revision to the Commission’s disclosure requirements, we are concerned that such revisions may have unintended consequences. In particular, I am concerned that eliminating Commission disclosure rules because they are duplicated by Financial Accounting Standards Board (“FASB”) requirements will lead to less disclosure. FASB has proposed to redefine its definition of materiality according to a narrow legal standard, and this definitional change will result in a reduction in the overall level of disclosure that will be required under U.S. GAAP.
Specifically, FASB proposes to redefine materiality as a legal concept as stated by the U.S. Supreme Court’s antifraud definition of materiality. FASB’s proposed definition shifts the determination of material information that “could influence decisions that users make” to a “substantial likelihood” that the disclosure will “significantly alter the total mix of information.” This legal definition sets the minimum floor for disclosure to avoid committing fraud; it should not be used as a guide for identifying the optimal amount of required disclosure.
Legal and regulatory proceedings in particular are of great interest to investors because they can significantly impact a company’s business model in ways that go far beyond the materiality of any contingent monetary liabilities. For example, the dollar amount of the Wells Fargo $185 million settlement with the CFPB for the alleged systematic opening of fraudulent accounts may not have been material to investors. But the existence of such a regulatory proceeding had material implications for Wells Fargo’s cross-selling business strategy as evidenced by Wells Fargo’s subsequent stock market value drop by almost $20 billion after the settlement was announced.
Neither Regulation S-K Item 103 nor U.S. GAAP require the disclosure of sufficient information on pending legal and regulatory proceedings. To help remedy this information deficiency, we support the greater use of bright line disclosure rules such as those required by Item 103 for environmental matters. I also favor preserving Item 103’s disclosure requirements for low-probability but high magnitude liabilities because these contingencies are significant risk factors for investors. Finally, disclosure of the venue, parties, and date of material legal proceedings is necessary to enable investors to conduct their own independent research.
I also believe that investors need more detailed disclosure of corporate income tax liabilities, not less. I support the incremental disclosure that Regulation SX Rule 4-08(h) provides in addition to the U.S. GAAP requirements, including disclosure of the amount of domestic and foreign pre-tax income and income tax expense. In addition, investors would benefit from requiring the disaggregation of foreign amounts of income tax paid and the effective tax rate on a country-by-country basis. Enhanced disclosure of foreign tax liabilities on a country-by-country basis will allow investors to better assess the tax avoidance strategies employed by multinational companies.
The elimination of purportedly outdated or superseded rules also risks reducing disclosure. For example, the proposed rule will eliminate the equity compensation plan information table that is required under Regulation S-K Item 201(d). While the stock exchanges now require that all equity compensation plans be approved by shareholders, I note that this table also requires disclosure of the number of shares available for future issuance. This information on a company’s equity compensation plan burn rate and remaining runway is material for shareholders. Moreover, eliminating proxy statement disclosure that is also contained in the financial statement notes will make this information less prominent for investors when casting proxy votes.
Finally, I am concerned that the Commission’s proposed rulemaking contemplates the elimination of various bright line disclosure rules. For example, the Commission proposes eliminating bright line rules for the separate reporting of repurchase agreements, disclosure of material restrictions on dividends, and the names of major customers. I caution that eliminating bright line rules in favor of a more principles-based disclosure requirement will diminish comparability of companies who may decide differently as to whether and how information must be disclosed. For this reason, disclosure requirements should include bright line rules where appropriate.
For these reasons, I urge the Commission to withdraw the proposed rule for further review. The Commission should carefully study the economic impacts on investors before moving forward with any rulemaking to eliminate existing disclosure rules. I share Commissioner Kara Stein’s concern that the technical subject matter of the proposed rule “fails to provide a bonafide opportunity for a wide variety of commenters to truly access and understand what is being proposed.” I also question the value of moving forward with this rulemaking at a time that there are still outstanding investor protection rules that are required to be adopted by the Dodd-Frank Act. Finally, promulgating this proposed rule before reviewing the comments on the Commission’s Concept Release concerning Reg S-K and disclosure raises questions as to the Commission’s commitment to full transparency and public consultation on these issues.
I appreciate the opportunity to comment on this proposed rulemaking.