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Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting

Keith F. Higgins

Director, Division of Corporation Finance

April 11, 2014


Thank you, Cathy [Dixon], for your kind introduction and for inviting me to speak to you today. I appreciate the opportunity to share my views on a hot topic — our disclosure regime and how we can make it more effective. Before I begin, I need to provide the standard disclaimer that my remarks are my own views and do not necessarily reflect the views of the Commission or any of my colleagues on the staff of the Commission.[1]

While the interest in disclosure has received heightened levels of public attention in recent months, it is hardly a new area of interest for the Division of Corporation Finance. Over the years, the Division has consistently challenged itself to rethink our disclosure requirements, and I would be remiss if I didn’t mention some of these recent efforts; don’t worry, though, my review of the Division’s history will be brief. During Alan Beller’s tenure as Director, the Division began to rethink how companies file disclosure documents and how it could update Regulation S-K. His successor, John White, took up the torch by challenging the Division to be vigilant in continuing to improve our disclosure system and the process, including the focus of our comments and new areas of disclosure that we recommend.[2] His successor and my immediate predecessor, Meredith Cross, followed up by directing the Division’s work that produced the detailed study of Regulation S-K that was issued last December. Alan Beller once said that each Director stands on the shoulders of those that came before him or her, and I am the beneficiary of their legacy. Our effort to improve the disclosure system today is, in large part, a continuation of the work that my predecessors started many years ago, and I would like to acknowledge their invaluable contributions on this important subject.

And I would be hard-pressed to find a better group with whom to start our current discussion about the ways to improve disclosure than the Federal Regulation of Securities Committee of the American Bar Association. This group knows disclosure and is vocal about it. In addition to providing thoughtful comments over the years on many of our rules, many of you also spend countless hours analyzing complex disclosure issues and working with your clients to draft their public disclosures. So, as I share my thoughts about how the Division is reviewing the disclosure rules and our practices, I want to encourage every person in this room to join the team effort to make disclosure more effective.

What is our plan?

So what is the Division’s plan for the disclosure project? As you know, the Commission released a staff report that presents an overview of Regulation S-K and the Commission’s initiatives over the years to review and update the disclosure and registration requirements.[3] The report was mandated by Congress under the JOBS Act and, although the mandate focused on emerging growth companies, the report is intended to facilitate the improvement of disclosure requirements applicable to companies at all stages of their development. In addition to serving as a comprehensive source for the regulatory history of Regulation S-K, the report identifies specific areas that the staff believes could benefit from further review.

The report was a springboard for further action, and I couldn’t be more pleased that the Chair asked the Division to lead the effort to develop specific recommendations for updating the disclosure requirements. Our goal is to review specific sections of Regulation S-K and S-X to determine if the requirements can be updated to reduce the costs and burdens on companies while continuing to provide material information and eliminate duplicative disclosures. At the same time, while always mindful of the costs and burdens of our regulation, we will ask whether there is information that is not part of our current requirements but that ought to be. While looking for ways that we can streamline our disclosure requirements is an important element of our review, reducing the volume of disclosures is not the sole end game. You may be surprised to learn that there are many investors who have expressed an appetite for more information, not less. If we identify potential gaps in disclosure or opportunities to increase the transparency of information, we may very well recommend new disclosure requirements.

A successful outcome for this project will require a team effort. A key component of our plan will include considerable public outreach to participants, and this process has already begun. We are launching a spotlight page on, and we are asking companies, investors and other market participants to give us their views on how we can make disclosure more effective. We will continuously update this page with details about roundtables and other news, although don’t expect hourly updates of our “status” a la Facebook or other social media. We are particularly interested in learning what information investors find most useful. As a few examples, we are considering questions such as whether there is information that we require companies to include in their filings that those investors routinely get elsewhere. Is there information that they routinely ignore? What information do they think is missing? And in the age of smartphones and tablets, how can information be easier to access and use? And do technological advances lend themselves to a “one-size-fits-all” approach, or should companies have flexibility to determine how they can convey information more effectively?

Regulation S-K

I can tell you that we are quite enthusiastic about the project. After all, reviewing disclosures is what the majority of the Division staff does day in and day out. This is not a small project, and there is no group of individuals better situated to get it off the ground. We will start our review of disclosure requirements by focusing on the business and financial disclosures that flow into periodic and current reports, namely Forms 10-K, 10-Q and 8-K, and, in one way or another, make their way into transactional filings. In our review, we also will evaluate whether Industry Guides and form-specific disclosure requirements should be updated and perhaps codified in Regulation S-K. We also will consider whether disclosure requirements should be scaled for certain categories of issuers, such as smaller reporting companies or emerging growth companies, and, if so, how. In a later phase of the project, we will consider ways to update and modernize disclosures that form the basis for most proxy disclosure.

So why did we choose to start our review with these items first? For one thing, it would be hard to dispute that these business and financial disclosures are critical information that investors rely upon to trade billions of dollars of securities in the secondary trading markets each day. These items are also the foundation of the disclosures that investors look to when contemplating whether or not to purchase securities offered by issuers through registered offerings. These disclosure requirements also have been revisited by the Commission or the staff less frequently in the recent past than, say, executive compensation and governance disclosures. Those seemed to be ample reasons alone why starting here made sense.

As I speak to you, we are forming teams across the Division to review specific requirements in Regulation S-K and the Industry Guides. Among the things these teams will do is identify potentially outdated disclosure requirements, such as the ratio of earnings to fixed charges — which is a requirement whose “one-size-fits-all” approach may result in disclosure that investors don’t find useful and companies wouldn’t otherwise calculate — or information that investors routinely find using other sources, such as historical stock prices. Of course, we understand that eliminating these two items is unlikely to reduce the burden of our disclosure requirements substantially, but we don’t think that’s an argument in favor of not considering it. Our efforts will involve both “small ball” and “big game hunting” — apologies for the mixed metaphors — and we will seek to reduce the burdens on companies, consistent with our mission of investor protection, wherever we can.

Our teams also will identify where our disclosure requirements result in redundancy or duplicative disclosures. For instance, a comment letter submitted in advance of the Regulation S-K report suggested that some disclosure requirements are no longer necessary because they were created to address voids in U. S. GAAP requirements (“GAAP”), which have since evolved.[4] As an example, the commenter indicated that the requirement to disclose certain off-balance sheet arrangements resulted from a void in GAAP at the time. To the extent that GAAP has caught up, perhaps it is time for us to look at any redundancy between Management’s Discussion and Analysis (“MD&A”) disclosures and the financial statement footnotes.

And finally, our teams will recommend whether our disclosure requirements might benefit from a broader principles-based approach, similar to our current rules for MD&A. We also will consider whether certain of our disclosure items are more likely to result in a laundry list of disclosures or a “check-the-box” approach to disclosure.

Regulation S-X

Regulation S-X also will be an important part of our review. Several rules require the filing of separate financial statements for entities other than the registrant, such as acquired businesses, equity method investees and guarantors. The application of these rules can be quite challenging at times, and compliance can be costly. Still, this information may be quite material to investors.

In reviewing parts of Regulation S-X, we will seek input to help us determine how investors use these separate financial statements in their decision-making, how costly it is for companies to obtain them and whether the benefits justify the challenges of presenting them. Regardless of where we may land on any recommendations, we will most certainly consider these matters, as well as whether the rules should require bright line tests or a more general principle of materiality. These are complicated questions that affect the delicate balance between investors’ needs to be reasonably informed and the cost to companies to prepare the information, as well as their need to access capital markets in a timely and cost-effective manner.

Turning to another topic related to financial statements, we plan to review differences in the disclosure requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. For example, if there has been a change in accounting principles, Form S-3 requires recasted financial statements prepared in accordance with Regulation S-X before a registration statement is declared effective. Yet no such requirement applies to Exchange Act reports. To be sure, we have historically pointed to the different incentives that might exist when a company is seeking to raise capital, but that is an assumption that is worth examining. Our focus will be on whether there are opportunities to align the reporting requirements that make it less burdensome for companies to access the markets without sacrificing investor protection.

We also plan to explore whether there is overlap between the GAAP requirements in the footnotes to the financial statements and what the Commission’s rules require. Working with the Commission’s Office of the Chief Accountant, we have reached out to the Financial Accounting Standards Board to begin our discussion of these concerns. We hope that together we can identify ways to improve the effectiveness of disclosures in corporate financial statements and to minimize duplication with other existing disclosure requirements.

How and When Information is Disclosed

Shifting gears, disclosure effectiveness is not just about what information is disclosed to investors, but how it is disclosed as well. Over the past few years, technology has drastically changed the way we interact with one another, receive breaking news, get maps and music, and watch television shows — now viewers have the flexibility to stream, DVR and even “binge” on entire seasons. Over the same time period, companies’ filings have grown in length, and investors who are searching for specific information may have to scan scores of pages to find what they are looking for. Can we harness the rapidly changing technology that has made the sharing of information so efficient in other areas of life? Can we use it to bring the same level of efficiency to how investors find information about a company when they are making investment or voting decisions?

As part of our thinking on this question, we want to explore whether the focus and navigability of disclosure documents can be improved using structured data, hyperlinks or topical indexes. There are a variety of potential approaches. We need investors, companies and market participants, who continually work with the data in filings, to provide input on the approaches that they believe are likely to achieve the best results.

We also will consider whether to recommend a “company disclosure” or “core disclosure” system. Under this approach, certain information that does not change as frequently — such as the description of the business and certain other company information ­— would be disclosed in a “core” document and then supplemented by periodic and current reports. This approach has a lot of appeal in its ease and simplicity. But how would changing to such a system affect the rhythm, timing and certainty of updating periodic reports? Would investors reasonably expect that material changes in “core” information would be updated promptly? Although the due dates of the Form 10-K and the Form 10-Q may have a bit of an “old school” feel, they provide, in effect, an archival time stamp, establishing the time at which the information speaks. Another important consideration is how the current liability scheme and disclosure controls and procedures, including certifications and audits, would operate in a “core disclosure” system. These are just some of the thought-provoking questions that must be considered.

Call to Action

So now, I’m going to put the ball in your court and make it clear why I’m talking about disclosure effectiveness to this particular audience today. There are certainly rule changes that we can recommend, but it is equally — if not more — important to consider sources outside of our rules that have contributed to the length and complexity in companies’ filings. There is a growing concern about disclosure overload. As the number of pages in annual reports has steadily increased, it may become more difficult for investors to find the most salient information. We all know that disclosure documents are getting longer — I read that over the past twenty years, the average number of pages devoted to MD&A and the footnotes to the financial statements has quadrupled.[5]

We also understand that materiality is not an easily applied litmus test. If there any gray areas — and as disclosure lawyers I would suspect that you more frequently see shades of gray, rather than black and white — the company is likely to include the disclosure in its filing. And why wouldn’t you? Why would you take the risk of omitting disclosure that might be material? But are too many items in the obviously immaterial category being included?

What about the practice of companies including detailed disclosure about recently issued new accounting standards only to conclude that the new standards did not have a material effect on the financial statements? Are companies including this disclosure simply to preempt questions? Is this disclosure material? And if it is, could the disclosure be more effective if it was included in a table or a single footnote? Again, we would be interested to hear the views of investors, companies and others in the market.

Disclosure overload for one person, however, may be not enough disclosure for another. While an individual investor may feel overloaded — and a bit overwhelmed — with information in a periodic report, other investors have said there is not a “part of the disclosure pie that goes uneaten.”[6] Investors in different securities also might have different needs. Are the informational needs of fixed income and equity securities the same? The question “who is the disclosure written for?” does not lend itself to an easy answer.

So where do you come in? There is a lot that you and the companies you represent can do to improve the focus and navigability of disclosure documents in the absence of rule changes. You can step up your game right now. And here are three examples of where I think you can begin:

  • Reduce Repetition — Think twice before repeating something. There are plenty of examples of companies including — verbatim — disclosure from their significant accounting policies footnote in their MD&A discussions of critical accounting estimates. Setting aside the fundamental question of whether our MD&A guidance on critical accounting estimates requires a recitation of the accounting principle itself, if there were ever a place in a report that cried out for a cross reference — and there are likely plenty of them — this is near the top of the list. The purpose of the discussion of critical accounting estimates is to educate the reader about the aspects of the particular accounting policy that are the most uncertain and subject to possible revision, not to repeat how the accounting policy works, which is described elsewhere. Before you repeat anything in a filing, please step back and ask yourself — do I need to say it again?
  • Focus Your Disclosure — I wonder if Abe Lincoln — who wrote the Gettysburg Address in 272 words — ever dreamed we would have annual reports with risk factor disclosure exceeding 30 or 40 pages. Some have suggested, only partly in jest, that we implement a page limit for risk factors or require companies to list their top ten risk factors. We can all probably agree that risk factors could be written better — less generic and more tailored — and they should explain how the risks would affect the company if they came to pass. There is no question that many companies have come to view these discussions as an insurance policy. After taking into account the safe harbor in the Private Securities Litigation Reform Act of 1995, and courts’ lack of uniformity about the interpretation of “meaningful cautionary statements,” the result is that companies have little incentive to limit the number of risk factors. I recognize this is a problem. But, are there effective ways to incentivize companies — and their lawyers — to write better risk factors that would allow investors to zero in on the material risks?

    Turning to a different example, the transparency of our review and comment process has had a generally salutary effect, which has been far reaching. One effect that may not be as salutary is the tendency for companies to simply follow what others have done when making disclosure decisions or to include disclosures because a client alert says that it is a “hot button” issue for the staff. However, the first question should be “does this issue apply to the company?” And when the answer is no, it should be the last question as well.

  • Eliminate Outdated Information — Disclosure should evolve over time. In a survey of 122 public companies, 74% said that once they include disclosure in a public filing in response to an SEC comment, it is rarely, if ever, removed.[7] Companies and their representatives should regularly evaluate their disclosures to determine whether they are material to investors. If they are not material, and they are not required, you can take them out. Yes, as unsettling as I am sure this can be for some, it is perfectly all right to remove disclosure when it is immaterial or outdated even if it was included in a prior filing in response to a staff comment. A response to a staff comment is not carved in stone and enshrined for time immemorial in each filing going forward — unless, of course, it remains material. And if it does, keep it in.

Review Program

We are asking companies to step up their game, so it is only fair that we take a look in the mirror. Where we find our comments result in unintentional outcomes, we will consider whether we should change our comment practices. This is not something that we can do overnight, but it is an area that is built into our plan. For example, we took a hard look at the outcomes of our comments on critical accounting estimate disclosures for pre-IPO share-based compensation.[8] We realized that the questions we asked to help us determine whether the accounting for share-based compensation was accurate typically led to detailed responses in the filing. We changed our practice, and our guidance now makes clear that the staff may issue comments asking companies to explain the reasons for valuations that appear unusual — for example, when there are unusually steep increases in the fair value of the underlying shares leading up to the IPO. However, the guidance makes clear that the comments are intended to help us determine whether the accounting is accurate, and not for the purpose of requesting changes to disclosure in MD&A or elsewhere. We realize, of course, that this is only a small step, and it is limited to companies that are going public. But we think it is indicative of the mindset that we are adopting — we are challenging ourselves to look at our longstanding practices and see where we can improve.

The staff of the Division of Corporation Finance — including me — needs to be mindful of the influence that our comment process has to shape company disclosure and use that influence wisely. As a general rule, when we are reviewing a filing, we issue comments when we believe a company may not be in compliance with a line-item requirement and when we believe information may not be included that would be material to an investor’s investment or voting decisions. However, just because we issue a comment, it does not mean that we have concluded the requested information is material. It is the beginning of what we hope is a dialogue. A response of “we don’t believe the information is material, but we’ll include it to clear the comment and move on” is not a desirable result — for the company, investors or us. We also must keep in mind that frequently the default position, as I previously noted, is to include the disclosure. So the Division needs to be judicious in the comments that it issues, and we hope that companies will not include immaterial information just for the sake of clearing a comment.


I’m coming down the home stretch of my prepared remarks. As I said when I started, I’m not the first Director to think about disclosure effectiveness, and I won’t be the last. The Division owes a tremendous amount of gratitude to its previous leaders upon whose shoulders I stand today. The Division is also thankful to individual members of the bar, including many who are in the audience today, who have suggested creative ways to improve the disclosure regime and who I expect will have many more great ideas to share as we move forward with our project.

I started my remarks today with the idea of a team effort, and let me throw out one last pitch on that note before I close. Improving our current disclosure system is an endeavor that will take a team effort to succeed fully. And I want to leave all of you today with an open invitation to contribute to this team effort — whether it is by working with the companies you represent to draft more effective disclosures or by sharing with us your ideas and suggestions about ways to make our disclosure requirements more effective. We always appreciate receiving comment letters from the American Bar Association, and we look forward to valuable feedback from its individual members. Our effort will truly succeed only if all of the stakeholders in our current disclosure system — companies, investors, legal and accounting professionals and other market participants — contribute to the dialogue about the improvements that could be made to the quality and effectiveness of disclosure so that it is less burdensome both for companies to prepare and for investors to read. And we are committed to working with each of these stakeholders. Better disclosure benefits everyone.

Thank you and I’ll be happy to answer your questions in the time that we have remaining.


[1] The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.


[2] See, John W. White, “Don’t Throw Out the Baby with the Bathwater: Keynote Address at the ABA Section of Business Fall Law Meeting” (November 2008) available at:


[3] See “Report on Review of Disclosure Requirements in Regulation S-K” (Dec. 2013), available at:


[4] See letter from Ernst & Young LLP available at:


[6] See Eleanor Bloxham, “Do investors have too much information?” (Oct. 2013) available at: .


[7] See KPMG LLP and Financial Executives Research Foundation, Inc., Disclosure overload and complexity: hidden in plain sight, available at: .


[8] See Division of Corporation Finance, Financial Reporting Manual, available at:, at Section 9520.1.



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