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Speech by SEC Commissioner:
Let the Story Shine Through


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Remarks Before WESFACCA
Darien, Connecticut
March 5, 20101

Good afternoon and thank you Ed for that warm introduction. I am delighted to be your luncheon speaker and would especially like to thank all of you in the audience for taking the time from your busy schedules to be here today.

Today I would like to focus on a core aspect of the federal securities laws and, in my view, one of the most important tools that you have to assist you in your efforts to provide sound advice about corporate issues — the disclosure requirements laid out in our federal securities laws and regulations.

Before I continue, though, I have my own disclosure requirement. I must remind you that my remarks today are my own and do not necessarily reflect the views of the Securities and Exchange Commission, the SEC staff, or my fellow Commissioners.2

I’d like to begin my remarks today with a quote from the Pulitzer Prize-winning U.S. novelist, Anne Tyler. She said “[w]hat I hope for from a book - either one that I write or one that I read - is transparency. I want the story to shine through.” While I certainly haven’t seen many 10-K’s that read like one of Ms. Tyler’s novels, I submit to you that our disclosure regime is intended to give companies the freedom necessary to let their stories — of course, only the nonfiction3 kind — shine through for investors.

Investors need transparency — in other words, the story about the companies in which they choose to invest. This information is critical to assist them in allocating capital to its most efficient use and to making both the investment and the voting decisions that are right for them. And, it is absolutely essential to the health of our capital markets.

In addition, our disclosure requirements also play an important role in facilitating communication among a company’s board, senior management, and the company’s shareholders. Managers, in light of their familiarity with the details of a company’s operations and financial condition, play a special role in that chain of communication. Our disclosure requirements are designed to draw on management’s vantage point with respect to this information. In the words of the late Columbia University Law School Professor Louis Lowenstein:

[Our] financial disclosure system, while intended to permit investors and creditors to make rational decisions, and to make markets fair and efficient, in fact has the quite independent effect of forcing managers to confront disagreeable realities in detail and early on, even when those disclosures may have no immediate market consequences. . . Financial accountability to the public . . . requires of senior management no more than they routinely require of the divisional chiefs who report to them.4

Some might dispute Professor Lowenstein’s assertions. Yet I believe, as Professor Lowenstein also said, that “[d]espite the cries of anguish sometimes heard, there is nothing here that should surprise CEOs.” 5

I also firmly believe that our disclosure requirements play a critical role in corporate matters by empowering shareholders as they exercise their franchise rights to hold boards and managers accountable for their decisions.6 Of course, this year’s proxy season brings a critical new development with respect to shareholder franchise rights — the elimination of broker voting in uncontested director elections under NYSE Rule 452. I suspect — in fact, I’m certain — there are many retail shareholders out there who do not understand how important this change is — that they must now decide for themselves whether and how to exercise their franchise rights. As a result, our public companies are in danger of having significantly fewer shares voted than in years past.

We all need to participate in a “bring out the vote” drive, similar to the grass roots campaigns that we have seen recently. We all need to make sure that shareholders understand these changes and what they mean for the corporate franchise. We at the SEC are working hard to educate investors on changes to Rule 452. I encourage you to look over our investor alert about the new shareholder voting rules for the 2010 proxy season. You can access this alert by going to investor.gov or sec.gov. And, I hope that you will take action to make sure shareholders are aware as well. We need a public-private partnership that will be a productive one.

MD&A as a Communication Tool

Now, I would like to focus on one particular disclosure requirement that I believe plays a vital role in shaping a company’s policies and practices in governance, and in risk management and oversight. That disclosure requirement is the Management’s Discussion and Analysis or MD&A.

To me, Item 303 of Regulation S-K is the premier example of a place where companies should be communicating with their shareholders. As we said in 1989:

[t]he MD&A requirements are intended to provide in one section of a filing, material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant's prospects for the future.

In other words, it’s where management discusses and analyzes where it’s been and where it’s going — where a company tells its story. I strongly believe that you should view this as an opportunity, not a burden.

As the Commission noted in the 2003 Interpretive Release, the MD&A has three general objectives:

  • To provide a narrative explanation of a company through the eyes of management;
  • To provide the context within which financial information should be analyzed; and
  • To provide information about the quality of, and potential variability of, a company's earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of the future.

And these disclosures should be made in a way that communicates — truly speaks — to shareholders. I call on you to do everything that you can to assure that your company’s story shines through, in the words of Anne Tyler, and truly enables the owners, the shareholders, to view the company and its prospects through the eyes of its insiders.

MD&A Disclosures Today

Yet, I have noticed during my second tour of duty at the Commission that, although the present form for our MD&A requirements is approaching its 30th anniversary, many of the MD&As today are still not where they should be. Given the significance of these disclosures to investors and the relative freedom that our disclosure requirements provide to companies in drafting their MD&As, I find this quite troubling.

Of course, I don’t expect to explore with you today the myriad of issues that exist in crafting quality disclosures that comply with our rules and follow all of this guidance. Instead, I want to ask each of you to remember the critical role that you play in resolving difficult disclosure issues. As counsel, there is much you can do to make sure that your company’s story shines through for investors.

What do I mean by that? Overall, I would like to see companies:

  • recognize trends and uncertainties sooner;
  • make reasonable likelihood determinations before they become more likely than not; and
  • disclose this information to investors so that they can make their own, fully-informed investment decisions.7

The Commission and our staff are continuing to do everything we can to help you meet your disclosure requirements. For nearly 30 years, we have provided interpretive guidance and increased transparency about our review process. As one example, the Division of Corporation Finance published its “Dear CFO” letter last August related to loan loss provisions. In addition, the Division published Compliance and Disclosure Interpretations on the SEC’s website this past January to ensure that our guidance reflects the existing disclosure requirements for non-GAAP measures under our rules. While companies should, of course, make sure not to give non-GAAP measures greater prominence than their GAAP measures, the guidance seeks to encourage you to at least think about including non-GAAP measures in Commission filings if your company uses those measures in earnings releases and other communications with the investor and analyst community.

Last month, the Commission issued interpretive guidance regarding disclosure in the area of climate change. Please note that I said interpretive guidance. This guidance is not a new rule or legal obligation. And, it does not alter your existing disclosure obligations or the Commission’s prior interpretations of the relevant disclosure provisions. It is my expectation, though, that this interpretive guidance will encourage you to redouble your efforts to better comply with our existing disclosure requirements. And I say that not only with respect to climate change, but with respect to other areas as well. As I have said publicly before, if I were drafting disclosure for a registrant today, I would carefully consider whether the particular facts and circumstances with respect to the impact of climate change on that company raise any disclosure obligations under the current rules, and in particular, under the MD&A requirements.

On a broader level, Chairman Schapiro announced last fall that we are undertaking a comprehensive review of our line item disclosure requirements for companies in their quarterly and annual filings, as well as their offering documents.8 Many of our core requirements have not been updated in close to 30 years. Our goal is to determine whether any of our requirements should be updated to reflect the kinds of information that investors seek in making their investment decisions. As Chairman Schapiro stated, “our efforts will be targeted at making sure that investors are receiving the right information, not more information.”9 I would also like to see our staff take a hard look to see whether our MD&A requirements need any updating, as well.

Now, I would like to offer you some more specific considerations for your upcoming MD&A drafting sessions:

First: Ensure that MD&A addresses investors like they are your business partners.

I think Warren Buffet got it right when he said (and I paraphrase) that he would like to see an MD&A written from the perspective of a CEO telling him directly what is going on in the business and the “key issues that sometimes keep [him] awake at night.”10

Given the recent financial crisis, I believe that now, more than ever, investors want and need the answers to basic questions like: What is the company’s business today? How did it perform? Where is the cash? What are the company’s key business drivers? What are the risks and uncertainties? How flexibly can the company respond to change? What do the company’s future prospects look like?

As the owners of the company, shareholders deserve to be kept informed. Would you try to speak to a business partner about your company using boilerplate? I hope not. You should treat shareholders with the same respect. Indeed, they truly are the most important business partners your companies have.

As former Director of the Division of Corporation Finance and my dear friend, Linda Quinn (along with her colleague Ottile Jarmel), aptly noted, “[t]he process of MD&A preparation should not be driven by fixed rules or static checklists, but by a methodology that is [as (added)] dynamic as the business itself.”11 At a minimum, that dynamic process should include that the drafters of disclosure read the script from the earnings call and the questions raised by analysts with a view towards addressing the key points emphasized by the company and the analysts. In addition, someone who has throughout the year actually attended the board meetings and heard presentations to the board about how the year is shaping up for a particular company and where there are worries should review the MD&A to ensure that it reflects the material trends the board is told about. I highly doubt that you will find this level of information simply by reading through board minutes.

Our current Director of the Division of Corporation Finance and another dear friend, Meredith Cross, has informed me that our staff will continue to carefully review earnings calls and earnings reports in connection with their filing reviews. So, if you do not already have a dynamic MD&A preparation process in place, I strongly encourage you to put one in now.

Second: Tell shareholders the whole story — the good, the bad, and the ugly.

As the Commission stated in 1981:

[i]t is the responsibility of management to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.12

The MD&A should be the place where management discusses the aspects of the company’s business and financing which it believes are most important. To me, the disclosure requirements are designed to promote open and frank discussion by management and, where necessary, in Professor Lowenstein’s words, “confront disagreeable realities.” That means that MD&As should tell investors the whole truth. If there is a problem with the MD&A, then there may very well be problems that run throughout the entire filing.

Third: Get off the elevator.

Despite the openness of MD&A’s design, current MD&A disclosures continue to use what former Commissioner Glassman referred to as the “elevator analysis”13 or x went up and y went down. These types of mechanistic disclosures are not very helpful.

I encourage you to get off the elevator and draft disclosures that are truly informative. I would like to emphasize that known trends, demands, commitments, events, or uncertainties may well arise during the interim period after the period covered in the company’s financial statements. If that happens and they are reasonably likely to have material effects on financial condition or results of operations, disclosure in the MD&A is required, not just a good idea.

Now, I recognize it might make things easier if there were some sort of bright line for making these determinations. And, I understand that former SEC Commissioner Ed Fleischman once estimated that the phrase “reasonably likely [or expected]” suggested a likelihood of about forty percent.14 I don’t want to put a number to it but, as I have stated before, “reasonably likely” is a lower threshold than “more likely than not.”

In addition, disclosures concerning critical accounting estimates should provide meaningful information to help shareholders better understand the extent to which estimates and assumptions are used in the preparation of financial statements. Investors should understand how variations in the level of precision or assumptions used in critical accounting estimates can have a material impact on the information presented in the financial statements. It is not helpful to just copy and paste the company’s accounting policies footnote straight into the MD&A. This is counterproductive, since it only adds bulk for investors to wade through. MD&A should help investors understand where significant judgment and estimates are used so they can better analyze the quality and potential variability of the company’s reported financial results.

Fourth: Please don’t wait for a reviewer in the Division of Corporation Finance to fill in the gaps.

You should not wait for our Corp Fin reviewers to tell you what to address in MD&A. I have heard tales, at least I hope that they are tales and tall tales at that, that companies wait to make disclosures until after the staff issues comments, hoping that they will be futures comments that don’t have to be followed until the next filing. Don’t count on that. As our Corp Fin Deputy Director Shelley Parratt indicated last fall with respect to executive compensation disclosure, if companies don’t make timely, complete, and transparent disclosures, they risk having to amend their filings.15 Don’t shirk your responsibilities. Your companies should know their own facts and circumstances, and you should encourage them to tell their own, nonfiction16 stories.

Investors should not have to undertake the many steps that our staff take in flipping back and forth among a company’s MD&A, financial statement footnotes, risk factors, earnings calls, earnings reports and website to get the full picture of where that company has been and where it is going. It is the company’s job to exercise the judgment necessary to determine what is important and address it in one place, the MD&A, before a Corp Fin reviewer issues comments.

Of course, I understand that company analyses and determinations of whether information is material and required to be disclosed involve judgment. And, I understand that you may experience some doubt in reaching your decisions about certain disclosures. I think if you take another look at the Supreme Court’s decision in TSC Industries, you will find some helpful guidance on how to proceed. There, the Court stated, “it is appropriate that these doubts be resolved in favor of those the statute is designed to protect.”17

Other Initiatives — Proxy Access

Before I conclude my remarks today, I want to just briefly mention one additional area related to corporate governance. I know that you are probably anxiously awaiting a glimpse into where I think the Commission is headed on proxy access. I am afraid that my remarks this afternoon will disappoint you. I do not wish to elaborate on this important initiative based on where we currently stand in our deliberative processes. But, I can tell you with certainty that our end game is to address investor confidence in meaningful ways that are built to last.


Communication, particularly through the disclosure process, can foster the kind of corporate culture necessary to build and maintain sound corporate practices and policies. And, of course, we all know the tremendous impact that disclosures like MD&A have on investor decisions and market prices.

I believe that it is critical to disclosure quality that you keep in mind the end-user — the investor — at every step in your disclosure process. And, I strongly request that you step up your disclosure efforts and do everything you can to do the best possible job you can do. I reiterate my plea: Please do everything that you can to ensure that your company’s story shines through and fully informs the investor-owners.

Thank you.

1 Commissioner Walter gave similar speeches concerning Management’s Discussion and Analysis at the 48th Annual Corporate Counsel Institute held in San Francisco, California on December 4, 2009 and at the Practising Law Institute’s Corporate Governance 2010 — A Master Class held in New York City, New York on February 17, 2010.

2 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.

3 Commissioner Cynthia A. Glassman, Remarks before the Tenth Annual Corporate Counsel Institute Priorities and Concerns at the SEC, (March 9, 2006), available at /news/speech/spch030906cag.htm.

4 Louis Lowenstein, Financial Transparency and Corporate Governance: You Manage What You Measure, 96 COLUM. L. REV. 1335 (1996).

5 See footnote 4 above.

6 See footnote 4 above.

7 Compare with Commissioner Edward A. Fleischman, Address to the Eleventh Annual Southern Securities Institute, “The Intersection of Business Needs and Disclosure Requirements: MD&A (March 9, 1991), available at http://www.sec.gov/news/speech/1991/030191fleischman.pdf.

8 Chairman Mary L. Schapiro, Address to the Practising Law Institute’s 41st Annual Institute on Securities Regulation (November 4, 2009), available at http://www.sec.gov/news/speech/2009/spch110409mls.htm.

9 See footnote 8 above.

10 Roundtable Discussion on Financial Disclosure and Auditor Oversight held in New York, NY on March 4, 2002, available at http://www.sec.gov/spotlight/roundtables/accountround030402.htm. See also, Louis M. Thompson, Jr., “When Full Disclosure Still Isn’t Enough,” Compliance Week (April 22, 2008).

11 MD&A 2003: Linchpin of SEC Post-Enron Disclosure Reform, New Disclosure Regime Post SOX Rulemaking Program at ABA Spring Meeting, Los Angeles, CA (April 4, 2003).

12 Securities Act Release No. 6349 (September 28, 1981), 23 SEC Docket 962 [not published in the Federal Register].

13 See footnote 3 above.

14 See footnote 7 above.

15 Deputy Director. Division of Corporation Finance, Shelley E. Parratt, Executive Compensation Disclosure: Observations on the 2009 Proxy Season and Expectations for 2010 (November 9, 2009), available at http://www.sec.gov/news/speech/2009/spch110909sp.htm.

16 See footnote 3 above.

17 TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, at 448 (1976)



Modified: 06/04/2010