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Statement on Proposal of FAST Act Modernization and Simplification of Regulation S-K

Commissioner Kara M. Stein

Oct. 11, 2017

Good morning.  I would like to join Chairman Clayton in thanking the staff for their work on this proposal and, in particular, Shehzad Niazi, Daniel Morris and Angie Kim in the Division of Corporation Finance, Michael Pawluk and Matt DeLesDernier in the Division of Investment Management, Adam Yonce and Narahari Phatak in the Division of Economic and Risk Analysis, and Bryant Morris from the Office of General Counsel.

I also want to welcome Chairman Clayton, Bill Hinman, the Director of the Division of Corporation Finance, Jeff Harris, the Director of the Division of Economic and Risk Analysis, and Bob Stebbins, the Commission's General Counsel, to their first open Commission meeting.  

Today, we are considering rule changes to some of the Commission's disclosure requirements for public companies.  Most of the proposed changes before us today were recommended in a November 2016 SEC staff report to Congress.  This report implemented Section 72003 of the Fixing America's Surface Transportation Act, or the FAST Act.[1]    

The SEC staff report recommended a variety of technical revisions to certain rules and certain forms.[2]  The report also addressed ways to "modernize" or improve the manner of presentation and delivery of disclosure to investors.

The proposed rule before us today would implement some of those recommendations.  I would like to highlight a few that may benefit from additional context.

First, let's address how we move towards truly modernizing our disclosure.  Let's talk about the legal entity identifier, or LEI, and its place in a 21st century disclosure regime.  An LEI is a globally recognized reference code used across markets and jurisdictions to uniquely identify companies.  In short, it is like a stock keeping unit, or SKU, that you see on the items you purchase from a grocery store.  A SKU allows you to identify the unique product you are buying.  In the same way, LEIs allow investors, and the markets more broadly, to accurately and easily identify companies.  This is imperative for investors and regulators alike to understand the corporate structures of companies, many of which have hundreds of subsidiaries. 

The notion of providing a means for investors and regulators to more quickly identify companies assumed greater importance following the financial crisis of 2007.  A key question for us and investors then was how best to make sense of, and piece together, a complex financial system.  LEIs, which are a result of a public and private partnership, emerged as a means of piecing together that puzzle and understanding those connections.  We often talk about how one company is buying another or how a bank is rolling out a new product.  But we all know that the realities of such a transaction are not that simple.  For example, the acquisition company may be a subsidiary company two layers below its reporting parent company.  A bank providing financing for a multi-billion dollar deal may be issuing a new product through one of several thousand affiliates.  In addition, many of those subsidiaries and affiliates may have incredibly similar names, or names that include suffixes with variations of punctuation and format.  These distinctions may not matter in casual conversation but we do not always have the luxury of casual imprecision.  If a crisis emerges, we want to know quickly and with precision which subsidiary or affiliate holds the money or can fix the issue.  LEIs are a modern day way of identifying companies, their connections, and their overall market exposure.  We have made significant progress in the acceptance of LEIs and require them already in other Commission rules and other rules by both U.S. and foreign regulators.[3] 

Today's release does not go as far as it could in requiring LEIs for registrants and subsidiaries.[4]  I encourage commenters to weigh in on this issue.

I also hope commenters focus on two other aspects of the proposal.

The proposed rule would potentially reduce the information investors receive about a public company by eliminating a year's worth of comparative discussion about its business's operations, financial performance, trends, or prospects.[5]  This discussion, which is located in Management's Discussion & Analysis, or MD&A, can provide investors with critical information about a company's business from the perspective of the company's managers.  Is the approach in the proposed rule, which reduces the disclosure possibly presented in MD&A, consistent with ensuring that investors have ready access to the fulsome information they need?

Finally, the proposed rule would change the process that companies follow when they want to redact sensitive information from their publicly filed business contracts.[6]  Currently, this process involves the company applying to the Commission staff for permission to redact information that may be competitively harmful and which they can prove to the staff is not material.  The new process proposes allowing the company to make this decision for themselves, without prior staff review.  Is this streamlining of process something that will impact the substance and quality of the information reaching the marketplace and investors?  Again, I encourage comment on these issues. 

Overall, I am supportive of today's proposal because it would make some modest and marginal changes to our disclosure framework.  However, this proposal could go further to truly modernize both how companies provide disclosure and how investors receive it.  I invite a wide variety of commenters to weigh in on these issues and look forward to receiving your best thoughts on these matters.

Thank you.


[1] Pub. L. No. 114-94, Sec. 72003, 129 Stat. 1312 (2015). See also Report on Modernization and Simplification of Regulation S-K (Nov. 23, 2016), available at

[2] The staff's recommendations covered, for example, updates to the requirements relating to incorporation by reference, disclosure of registrants' material physical properties, management's discussion and analysis of financial condition and results of operations, risk factor and insider disclosures, and certain registration and prospectus information.

[3] See Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)].  See also Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information Exchange Act Release No. 75611 (Aug. 5, 2015) [80 FR 48963 (Aug. 14, 2015)].  The CFTC's Swap Data Recordkeeping and Reporting Requirements contain requirements pertaining to LEIs.  See 17 CFR 45.6.  In addition, a number of European Union regulations and directives require the use of an LEI.  See Briefing Note ESMA70-145-238, European Securities and Markets Authority (Oct. 9, 2017), available at also the Global Legal Entity Identifier Foundation, available at

[4] See Proposing Release at Section II.E.4.

[5] See Proposing Release at Section II.B.1.

[6] See 17 CFR 229.601(b)(10).  See also Proposing Release at Section II.E.3.

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