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Statement on the Disclosure Update and Simplification Proposing Release

Commissioner Kara M. Stein

July 13, 2016

Good morning. I would like to thank each of you for your work on this release.

Today, we are considering a proposal to “simplify” certain of the Commission’s disclosure requirements. Today’s release purports to identify provisions that may be redundant, duplicative, overlapping, outdated, or superseded — based on other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), or changes in the information environment. The release also requests comment on whether certain disclosure items currently required by Commission rules, but which are not included in U.S. GAAP, should be retained, modified, or referred to the Financial Accounting Standards Board (“FASB”) for possible incorporation into U.S. GAAP.

With each of the releases put forward under Chair White’s Disclosure Effectiveness Initiative,[1] I have voted to move forward with soliciting comment. I voted to solicit comment even while questioning the scope, necessity, and timing of each release. I believe that providing legitimate opportunities for comment is critical not only for transparency but also to improve the substance of what is ultimately produced. However, in order for this to occur, the opportunity for public comment must be meaningful. I am not sure that standard is met by the proposal we are considering today.

Despite its 500 plus page length, this proposal may be framed in such a hyper-technical way that it fails to provide a bonafide opportunity for a wide variety of commenters to truly access and understand what is being proposed and what we are seeking comment on. Any rulemaking release on a technical subject matter can and should, be made accessible to all of the stakeholders who will be impacted if the proposal is adopted.

Unfortunately, the release before the Commission today may exclude commenters from the dialogue and limit access to our rulemaking process to specialized experts.[2] For example, how can non-experts compare distinctions between Rule 4-08(m)(1)(ii) of Regulation S-X and Accounting Standards Codification 860-30-50-7 without more information?[3] How are investors to weigh in if they can’t make heads or tails of the subject matter? I requested the release provide greater clarity and context for these topics and others. This was not adequately done.

It is bitterly ironic that a release on disclosure effectiveness fails to present information in a clear, concise, and understandable way to the public. How can we require issuers to provide information in plain English, yet fail to meet this standard ourselves?[4] Moreover, how are we to fulfill our mission of investor protection if we effectively exclude commenters from engaging on rulemakings that will impact the disclosure they receive? How are we to be the investor’s advocate, if we do not provide investors with bonafide opportunities to engage?

Bonafide opportunities to access a rulemaking and contribute must be just that—legitimate opportunities in which input from all market participants is encouraged and actively sought out in order to effect a greater balance of perspectives. It may mean that we re-think how we present technical subject matter in our rulemakings to render it more accessible to those who will be impacted by the disclosure and the rule revisions contemplated. Bonafide opportunities to access a rulemaking may translate into considering how the Commission conducts outreach to investors to broaden the scope of voices at the comment table. It may mean drafting releases in which the historical rationale behind disclosure requirements are explained so that commenters have context upon which to answer questions as to the suitability of retaining, modifying, or eliminating a requirement. I requested that such clarification be provided in this release. This was not adequately done.

So today, we are once again seeking to answer what I believe should be the threshold questions for each of these Disclosure Effectiveness Initiative releases.

What disclosure regime are we envisioning and for whom? Going forward, how do we improve disclosure to take advantage of the rapidly evolving and powerful technologies that are now in the marketplace? How do we accomplish change to disclosure requirements in a balanced manner? How do we avoid mandates that purport to “simplify” from becoming Trojan horses for disclosure elimination that harms investors, registrants, and our markets?

For example, let us focus on the proposed elimination of certain SEC disclosure requirements relating to repurchase agreements in the financial statements. Accounting rules and disclosures regarding repurchase agreements are topics we all became familiar with as a result of the financial crisis.[5] In 2014, in an effort to address criticism regarding the accounting for repurchase agreements, the FASB updated its U.S. GAAP standards.[6] This release proposes to eliminate overlapping disclosure required by the SEC in light of these updated principles under U.S. GAAP. However, it fails to address the larger issue of disclosure of liquidity risk and maturity mismatch. Rather, the proposal makes conclusory statements about the similarity between the SEC rules and the principles under U.S. GAAP. However, despite the conclusory assertions, the SEC and U.S. GAAP disclosure requirements differ in both form and content. The SEC disclosure requirements require a greater amount of information and specify how the information should be presented. U.S. GAAP does not. I encourage comments on these differences and what effects they may have.

Additionally, this release proposes moving disclosure from the main text of the disclosure document to the financial statements. Movement of disclosure to the financial statements has certain benefits and costs. For example, depending on how the FASB completes its project to redefine materiality, movement could actually result in elimination of disclosure.[7] Accordingly, as a result, investors may receive less or no information if such information is only required by U.S. GAAP and the issuer determines that the information is not material. I encourage commenters to focus on this issue.

Another area of concern to me is how the Commission decides to refer issues for consideration to the FASB[8], the designated private-sector standards setting organization. Despite my repeated requests to expand the discussion of what is envisioned by this procedure, there is no real explanation articulating what gets referred or why items are referred and whether commenters believe this would result in benefits to both investors and issuers. SEC rulemaking is subject to the certain legal requirements, including notice and comment.[9] However, matters referred to the FASB are not subject to the same notice and comment requirements as SEC rules. Whatever this referral process is, it should be thoughtful and certainly should be transparent.

Despite its shortcomings, I hope that a wide variety of commenters weigh in on the core issues implicated by this release—access and materiality. Fundamentally, this release is about identifying what is material disclosure, who should be engaged in making this determination, and how we obtain feedback on such issues. With each disclosure release, we should be seeking feedback on alternatives to disclosure elimination, which may focus on how we best modernize disclosure for the benefit of both issuers and investors.

Additionally, I hope commenters contribute to the dialogue by pointing out whether they agree with the categorization of items that are purportedly “reasonably similar.” When you move from standards that are detailed to standards that are principles-based, is material information lost? Are we adequately considering both the costs to issuers and the benefits to investors and our markets from having disclosure?

Finally, as with all proposed rules in the Disclosure Effectiveness Initiative, I hope that commenters are not artificially limited by the scope of the release. If there are areas that the Commission should consider in modernizing and improving disclosure, we welcome such input via the comment process. Undoubtedly, there are new topics such as sustainability considerations, which may materially impact the financial disclosure that a company provides and also reflect the evolving concept of materiality. If these new topics are not addressed by either current disclosure requirements or U.S. GAAP, should they be, and if so, how?

I hope that we can move forward with this release in a balanced manner. I hope we can create opportunities for comment that are truly open and which engage all stakeholders.

I will vote yes for this release because it creates a mechanism for comment but I do so begrudgingly for the reasons I just outlined.

Thank you.

[1] See SEC Press Release 2013-269 (Dec. 20, 2013) available at; see also, Business and Financial Disclosure Required by Regulation S-K (Release No. 33-10064 (Apr. 13, 2016) available at ; Modernization of Property Disclosures for Mining Registrants, Release No. No. 33-10098 (June 16, 2016) available at

[2] For example, as noted in footnote 110 of the proposing release, a motivating factor behind this particular aspect of the Disclosure Effectiveness Initiative appears to have been the comments of an accounting firm. The firm encouraged the Commission to coordinate with the FASB on a disclosure project that would eliminate the need for certain SEC disclosure requirements. See, e.g., Letter from Ernst & Young LLP (Nov. 20, 2015) available at

[3] These provisions address disaggregated disclosure requirements relating to repurchase and reverse repurchase agreements under Commission disclosure requirements versus U.S. GAAP.

[4] See, e.g., 17 CFR 230.421; see also, Plain English Disclosure, Securities Act Release No. 33-7497 (January 28, 1998).

[5]See, e.g., Steven Smalt and J. Marshall Mc Comb II, An Examination of Repurchase Agreements, Journal of Finance and Accountancy, Volume 19, March 2015 available at (outlining the accounting loophole that Lehman Brothers took advantage of in effecting its infamous “Repo 105” transactions. These accounting manoeuvers allowed Lehman Brothers to temporarily remove billions of dollars of assets from its balance sheet, thereby hiding the true extent of its leverage.)

[6] See Accounting Standards Update (“ASU”) No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.

[7] See, e.g., Letter to the FASB from the SEC Investor Advisory Committee available at

[8] In addition, the Release prominently highlights International Financial Reporting Standards (“IFRS”) as promulgated by the International Accounting Standards Board (“IASB”). See Proposing Release on Disclosure Update and Simplification (July 13, 2016) at Section C.II. B, “Proposed Amendments-Corresponding U.S. GAAP, IFRS or Commission Disclosure Requirement.” However, in most of the cases presented in the chart in this section, there is no comparable IFRS disclosure requirement. Further, the Commission has not designated the IASB as the private-sector accounting standard setter for U.S. financial reporting purposes.

[9] The Commission’s rulemaking process is governed by a number of legal requirements, including, for example, requirements under the federal securities laws, the Administrative Procedures Act, the Paperwork Reduction Act the Small Business Regulatory Enforcement Fairness Act and the Regulatory Flexibility Act.

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