While visiting Texas, Securities and Exchange Commission Chair Atkins addressed corporate law matters and disclosure reform issues.  Here, we address the Chair’s comments related to disclosure reform.  Chair Atkins once again emphasized the need to return to principles of financial materiality when considering disclosure requirements.  He noted as well that disclosure requirements should be tailored based on a registrant’s size and maturity.  In discussing the recently announced review of Regulation S-K, Chair Atkins identified several core guiding principles: 

  • rationalizing disclosure requirements, calibrating the level of disclosure taking into account its cost;
  • simplifying disclosures so these are easier for companies to prepare and also for investors to understand.  Here, he pointed to the pay-versus-performance rules as the opposite of this—it is disclosure that’s complex and has necessitated in some instances the use of specialized consultants and has failed to yield straightforward, comprehensible disclosure for investors; and
  • modernizing disclosures, such as, for example, addressing executive security given our current environment and the fact that executive security is increasingly a necessity and should no longer be viewed as a perk.

He also pointed to additional themes that relate to the reform of executive compensation disclosure and corporate governance related disclosure.  Chair Atkins noted the “SEC’s attempt to indirectly regulate, or set expectations for, matters of corporate governance through comply or explain disclosure requirements” and “regulation by shaming.”  He identified a number of disclosure requirements that are impractical, including related-party transaction disclosure requirements, which also were flagged by Commissioner Uyeda in a recent speech.

Finally, the Chair highlighted the need to rethink completely the approach to risk factor disclosure.  He suggested that possibly the SEC or companies might maintain a set of risks published separately outside of the annual report that broadly apply to most companies across most industries and are generally applicable to investments in securities.  These could be referenced rather than repeated in each company filing.  This way, each risk factor section in an offering document or a periodic report would be shorter, focusing on risks specific to, and material to, the company.  Chair Atkins noted that if the principal purpose served by risk factors is protecting companies from potential litigation then the appropriate remedy ought to be addressing our litigation environment and potentially offering a safe harbor from liability.  He noted that, “The Commission could adopt a rule stating that failure to disclose impacts from publicized events that are reasonably likely to affect most companies will not constitute material omissions for purposes of some or all of the federal securities laws’ anti-fraud rules. Such a safe harbor could incentivize companies to include fewer generic risk factors by shielding them from liability for events related to those generic risks. After all, if companies are not compelled to catalogue nearly every conceivable contingency to guard against hindsight litigation, then they can focus on risks that are more distinctive to their business.”  It’s an interesting approach.  Maybe this type of creative thinking will inspire commenters on the Regulation S-K reform initiative to be bold.  See the full text of the Chair’s remarks.