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Statement at Open Meeting on a Concept Release on the Business and Financial Disclosure Required by Regulation S-K

Commissioner Kara M. Stein

April 13, 2016

Good morning.  I would like to thank all of the Division leaders and the staff from the Division of Corporation Finance for their hard work on this release and in particular, I’d like to thank Angie Kim, Karen Garnett, and Raquel Fox.

Justice Brandeis once wrote, “[s]unlight is said to be the best of disinfectants; electric light the most efficient policeman.”  But he warned, “[t]o be effective, knowledge of the facts must be actually brought home to the investors…”[1]

Today, the Commission considers issuing a Concept Release on how to improve our disclosure framework and how to better bring “knowledge of the facts…home to… investors.”  At the moment, we are focusing on the rules that cover non-financial statement corporate disclosures, otherwise known as Regulation S-K.

In 1977, the Commission adopted Regulation S-K in an effort to “streamline the preparation of disclosure documents” and to “assure uniform information for investors and other information users”.[2]  Initially, Regulation S-K required the company to provide a description of its business and the principal properties of its reportable industry segments.  From 1977 to 1982, the Commission made additional changes to Regulation S-K to integrate the disclosure requirements of the Securities Act and the Exchange Act and to simplify reporting.  As a result, Regulation S-K became the central repository for corporate disclosure to investors.[3]  It prescribed the information companies needed to provide investors to allow them to make informed voting and investment decisions.

Today, more than 30 years after the main requirements of Regulation S-K were adopted, we have an opportunity to thoughtfully think about what our disclosure regime can be in 2016 and beyond.

What could a re-imagined disclosure regime look like?  What disclosures are the most useful and important to investors and issuers?  How can we use investor and focus groups to help inform the Commission? 

First, we need to acknowledge that investors in 2016 may have fundamentally different views about what information is important to them compared to investors 30 years ago.  For example, there may be social concerns that are important to an investor’s investment calculus in 2016, which may not have been material to an investor at all in 1982.  

We should take this opportunity to examine advances in fields like behavioral finance and economics to better understand what information investors now consider useful. [4]  We also have an opportunity to re-imagine how information is provided to investors in a  digital world.  For example, many companies now use infographics instead of narrative text to make disclosures more relevant, reader-friendly and less “foggy”.[5]  Notably, this approach does not focus solely on eliminating disclosure.  Rather, the approach focuses on judiciously examining, improving, and re-formatting disclosure. 

While today’s Concept Release asks many questions, there were many more questions that should have been asked but were not.  I encourage all interested parties to help the Commission not only ask, but also answer, some of these questions.  What should we be thinking about?  What should we be asking?

In addition, the SEC’s form-based system is arguably antiquated, but that’s not addressed in the Release.  Also absent from the Release are specific questions relating to issues of corporate governance and transparency.  For example, should there be changes to our rules to address abuses in the presentation of supplemental non-GAAP disclosure, which may be misleading to investors? [6]

Today, investors make their decisions based on an array of information, which goes beyond mere profit and loss.  Many believe that the era of sustainability or impact investing has arrived.  Sustainability disclosure differentiates companies and it may foster investor confidence, trust, and employee loyalty.[7]  More importantly for investors, companies that adopt certain environmental, social, and corporate governance or ESG measures may perform better than those that do not.[8]  Yet our current disclosure regime, and the current Concept Release, do not specifically address many of these ESG topics.  For example, how should a modernized disclosure regime address communication to investors about diversity and inclusion measures?  Should there be specific disclosure requirements added to enhance transparency for investors regarding the companies they invest in? Are they good corporate citizens? Are they socially responsible?

The Release also asks questions about the quantity of disclosure currently required.  We must approach such questions carefully to avoid repeating the mistakes of the past.[9]  We should balance concerns about the quantity of disclosure with equally important considerations about the quality, presentation, and format of disclosure.  A Generation Zer may not want to engage with EDGAR, the Electronic Data Gathering, Analysis and Retrieval system, which is the Commission’s central database for corporate filings.  She may instead prefer receiving information via tweet on her mobile phone.  In contrast, the same information may need to be accessed and presented in a different manner to a Baby Boomer or to an analyst.  These considerations also implicate the re-envisioning of the EDGAR system.  I hope that information aggregators, vendors, and others will provide us with their best thoughts on how to improve and enhance our central database for corporate disclosures. 

Finally, the Release also poses questions about the suitability of scaled disclosure for certain types of registrants.  Certain registrants are denied privileges under our rules because they have violated securities laws or are within categories of issuers that raise the greatest potential for fraud to investors.  Shouldn’t our disclosure regime create incentives that encourage registrants to provide quality information to the market before allowing them the privilege of scaled disclosure? 

As we embark on this project, I also look forward to hearing from our Investor Advocate, our Investor Advisory Committee, and all investors, large and small, regarding the modernization of Regulation S-K.  Please provide us with your thoughts on how to modernize our disclosure system, which includes input about topics that may be outside the limited scope of this Release.  Please write in, or engage with us, whether in the form of responses to surveys, investor focus groups, or other outreach.  Tell us how we should take into account the current digital world and improve how information is provided and delivered to investors. 

Today, I vote to support the issuance of this Release because it is a step towards starting the dialogue on how to modernize and improve the Commission’s disclosure framework.  That said, it is only a tentative first step.  Please think creatively and broadly, and help us provide knowledge of the facts to investors in the best way possible. 

Thank you.



[1] Louis Brandeis, What Publicity Can Do, Harper’s Weekly (December 20, 1913).

[2] See Adoption of Disclosure Regulation and Amendments of Disclosure Forms and Rules, Release No. 33-5893 (Dec. 23, 1977) [42 FR 65554 (Dec. 30, 1977)] (“1977 Regulation S-K Adopting Release”); see also SEC News Digest, December 27, 1977.

[3] See Adoption of Integrated Disclosure System, Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (“1982 Integrated Disclosure Adopting Release”).

[4] See.e.g. Robert J. Shiller, From Efficient Markets Theory to Behavioral Finance, 17 J. Econ. Perspectives 83, (2003);  See generally, Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (2000).

[5]Edward Teach, Rethinking Disclosure, CFO Magazine, available at http://ww2.cfo.com/disclosure/2016/04/rethinking-disclosure/.

[6]Francine McKenna, Which Non-Gaap Metrics Will Catch the SEC’s Eye? Marketwatch, available at http://www.marketwatch.com/story/which-non-gaap-metrics-will-likely-catch-secs-eye-2016-04-04

[7]Ernst & Young LLP & Boston College Center for Corporate Citizenship, The Value of Sustainability Reporting available at http://www.ey.com/Publication/vwLUAssets/EY_-_Value_of_sustainability_reporting/$FILE/EY-Value-of-Sustainability-Reporting.pdf

[8] See e.g. Letter From Jean Rogers, Sustainability Accounting Standards Board, available at http://www.sasb.org/letter-jean-rogers-sasbs-ceo/(describing the development of standards that observe patterns of material risk and ESG exposure across equity portfolios); David Katz and Laura McIntosh, Corporate Governance Update: Gender Diversity on Boards: The Future is Almost Here, New York Law Journal (March 24, 2016)(noting studies that show companies with strong female leadership and participation had higher return on investments than those without). See also, Nicole Friedman and Bradley Olson, Calpers Pushes Exxon to Outline Potential Effects of Climate Change Initiatives, Wall Street Journal (April 12, 2016) available at http://www.wsj.com/articles/calpers-pushes-exxon-to-outline-potential-effects-of-climate-change-initiatives-1460475184

[9] Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 88-95 (1963)(finding, among other things, that a lack of disclosure may harm registrants by raising the cost of capital, reducing incentives for investors to provide capital to registrants, or limit the secondary market for registrants’ securities).