United States: Less Is More

The SEC has a renewed focus on rationalising public company disclosure. There are some quick fixes that would reduce information overload.

The investing public is suffering from information overload. It's a diagnosis handed down by Mary Jo White, Chair of the US Securities and Exchange Commission (SEC), and caused by the pages of dense disclosure public companies produce each year to satisfy their ever-increasing SEC reporting obligations.

In recent months, White has been offering ideas on how public company disclosure could be streamlined to remedy the problem. Those ideas span from the obvious – like eliminating repetitive disclosure – to the transformative – like replacing today's periodic reporting model with a single company profile containing information that changes infrequently and real-time updates as new circumstances arise. Company profiles are an idea the SEC has thought about for years.

In December 2013, the staff of the SEC released the results of its study, mandated by the Jumpstart Our Business Startups Act (JOBS Act), of disclosure requirements for 'emerging growth companies'. Its purpose was to determine how the requirements can be updated to 'modernize and simplify' the registration process to make it less costly and burdensome for new public companies. The study went beyond the JOBS Act mandate and recommended a further, more comprehensive review of the entire disclosure regime for all public companies, not just emerging growth companies. That comprehensive review is on the SEC's agenda for 2014, and White's vision is ambitious. She wants the SEC staff to rethink not only what gets disclosed, but how and where it is disclosed, and how technology can be used to facilitate access and make information more meaningful to investors.

The good news is that a comprehensive review should result in a meaningful improvement to the public disclosure regime. But the bad news is, in the staff 's words, the comprehensive approach 'would likely be a longer-term project'.

How did investors get information overload?

The staff 's December report contains nearly 100 pages detailing the evolution of today's disclosure requirements. What is apparent from this painstaking historical account is that over the years, disclosure requirements have been re-shuffled, combined and added to as a result of comprehensive overhauls – including more recent reactionary legislation like the Sarbanes-Oxley Act and Dodd-Frank Act – with very little culling of rules that have become antiquated. The staff 's historical summary did not take into account other relevant factors such as disclosure requirements developed through SEC releases, staff guidance and informal interpretations, the SEC's enforcement history and the impact of court decisions – all of which will be studied as part of the staff 's comprehensive review. Pressure from institutional investors seeking more information on a variety of topics like corporate political contributions and the influence of proxy advisory firms on voting decisions also adds to the pages of disclosure. To makes matters worse, some of the most onerous new requirements are those that have been mandated by Congress to further political and social agendas.

Disclosure principles

The US system of public company disclosure forms the backbone of a transparent and functional trading market by providing investors with the information they need to evaluate an investment in a security. US disclosure requirements are built on the principle that 'material' information be disclosed to investors. Information is considered material if there is a reasonable likelihood that a reasonable investor would consider it important in making an investment decision. Determining what pieces of information meet the materiality standard is left to the judgement of a company's management, disclosure committee and lawyers. Layered on that basic concept are specific disclosure requirements found in the SEC's reporting forms and Regulation S-K, the framework of rules that specify by topic the disclosures required to be made in periodic reports and securities offering documents, as well as the SEC's financial statement requirements.

The process of creating a disclosure document, be it an annual report or initial public offering (IPO) prospectus, while helpful in vetting important issues, is also a significant contributor to information overload. The SEC reviews a company's SEC filings once every three years and reviews all IPO prospectuses, and asks questions through the comment letter process that often results in the addition of more disclosure.

From time to time the staff announces disclosure initiatives through bulletins or so-called Dear CFO letters. These focus on areas that have raised concerns for all public companies, like management's discussion of financial results or cyber security. These directives, while helpful in focusing companies on areas of concern, often result in new or clarifying disclosures. External factors like SEC enforcement actions and lawsuits alleging false and misleading disclosure also play a role in driving disclosure practices that focus more on minimising potential litigation risk than on communicating material information to investors. The disclosure process is rigorous – as it should be given its importance and purpose. But it has gotten bogged down in details that aren't all that relevant, marked by repetition and guided by fears that something important might get edited out which could expose the company to potential liability.

Where is disclosure reform headed?

In its December report, the staff offered a glimpse of where disclosure reform might take us in the future. First, they emphasised a principles-based approach to a new disclosure framework, but one that preserved the consistency, completeness and comparability of a rules-based approach. Second, the staff intends to look at the appropriateness of scaled-down disclosure requirements for some categories of companies, perhaps extending the benefits of the relaxed disclosure requirements afforded to emerging growth companies under the JOBS Act to a larger category of companies. Third, the staff will evaluate different methods of information delivery and presentation including the creation of a company profile (as described above). Lastly, the review will focus on ways to make disclosure documents more readable by eliminating redundancy, quantitative thresholds, and information that is readily available to market participants from other sources.

The staff also intends to consider economic principles in its of disclosure requirements. These principles would aim to improve the usefulness of disclosure to investors and, without losing sight of the importance of investor confidence in the reliability of this disclosure, would take into account:

  • the historical objectives of a particular rule;
  • whether information provided by a rule is readily available from reliable sources other than the company;
  • administrative and compliance costs;
  • the extent to which disclosure of proprietary information has competitive costs; and
  • the need to maintain the SEC's ability to conduct an effective enforcement programme.

There is no doubt that the staff 's comprehensive principles-based approach, areas of focus and consideration of economic principles will yield a much improved disclosure system that will alleviate some of the administrative burden and compliance costs while improving the clarity and usability of disclosure for investors. But this is a long way off. And in the meantime, there will be no incremental relief for public companies unless the staff acts informally on an ad hoc basis to advance its disclosure reform agenda. This seems to be happening. In his recent address to the American Bar Association, Keith Higgins, the director of the SEC's Division of Corporation Finance, called on companies and their lawyers to improve the focus and navigability of disclosure documents in the absence of rule changes by reducing repetition, focusing disclosure and eliminating outdated disclosure.

Quick fix reforms

One SEC commissioner recently expressed his preference for addressing discrete disclosure issues now rather than risk spending years preparing 'an offensive so massive that it may never be launched'. Chair White has already made a number of suggestions about what could be done to optimise disclosure requirements, some of which could be implemented in relatively short order if the staff were so inclined. The most obvious place to start is to question whether some information required to be disclosed under SEC rules is really necessary anymore. For example, White pointed to the disclosure of two years of the high and low trading prices of a company's common stock, a requirement that no longer serves a purpose in today's technology driven world.

Keith Higgins recently indicated that the SEC staff will no longer expect detailed disclosure about historical stock-based compensation practices in IPO prospectuses to support the reasonableness of a so-called cheap stock accounting charge. Today, it isn't unusual for companies to write pages about how they valued their common stock for purposes of pre-IPO employee stock option grants. This disclosure practice was not in response to any specific rule requirement, but grew mainly out of the staff comment letter process which sought details on company milestones that lead to valuation increases and methodologies used to support the analysis. This will be a welcome change for companies yet to file their IPO registration statements, but whether the staff can do much else to provide companies with incremental relief remains to be seen.

Duplication also adds to information overload. This problem still persists despite the SEC having enacted a rule in 1998 as part of its so-called plain English initiative that prohibits repetitive disclosure where it does not enhance the quality of the information. White has pointed to disclosure of a company's legal proceedings in multiple places as an example of redundant disclosure. One of the main drivers of repetition is the interplay between SEC requirements and the Financial Accounting Standards Board (FASB) loss contingency disclosure requirements. Financial statement disclosure is much more detailed, causing companies to struggle with disclosing less detail on the same subject elsewhere in the filing. The path of least resistance for many companies seems to be to simply duplicate the more detailed accounting disclosure elsewhere. Since 2009, the FASB has undertaken its own project aimed at improving the effectiveness of disclosure in the notes to financial statements (although not necessarily reducing their volume). It is unclear how any changes brought about by FASB's disclosure framework project will impact the rest of a company's filing. But without a clear effort on the part of the SEC and FASB to harmonise financial related disclosure requirements, overlap is inevitable.

Defensive disclosure practices also play a role in redundant disclosure. It will be very difficult for companies and their lawyers to stop duplicating paragraphs in various places throughout a filing without a push from the staff, as it is a relatively cost-free way of building an arsenal to ward off potential litigation threats. Keith Higgens recently gave that push. As a simple, quick fix for repetition in management's discussion and analysis, he suggested a cross reference to the corresponding financial statement disclosure.

Risk disclosure is another area that has become unwieldy, also largely as a result of efforts to forestall potential litigation. Risk disclosure spans from describing significant and fundamental risks, such as the lack of regulatory approval for the company's only drug product, to the truly baffling such as the risk that reduced disclosure requirements applicable to emerging growth companies might make the stock less attractive to investors. In many cases, the likelihood of the risk occurring, or that the same risk could apply to any company operating in any industry, does not seem to be taken into account. Chair White posits that the 1995 Private Securities Litigation Reform, which provided a safe harbour to encourage companies to disclose more forward-looking information, is partly responsible for the increase in the sheer volume of risk factor disclosure. This is because the protection is only available if the forward-looking statements are accompanied by 'meaningful cautionary statements'. There is little incentive for a company to scale back its risk disclosure. And other than better editing, there isn't likely to be a quick fix to ensure the cautionary statements highlight important – rather than all – factors that could cause the actual outcome to differ materially from a forward-looking statement.

While there may be some areas that could benefit from a quick fix, there are some aspects of information overload that may be out of the SEC's hands to remedy, even with a comprehensive overhaul of the system. Some of the most onerous and burdensome disclosure requirements in recent years have been the result of commandeering public company disclosure documents to advance the social and political agendas of members of Congress. In these cases, the SEC is between a rock and a hard place. It is obligated to adopt new rules to carry out laws enacted by Congress even if the SEC believes the disclosure mandate imposes increased compliance costs on companies while doing little to inform investment decisions.

For example, the Dodd-Frank Act requires companies to disclose their use of conflict minerals (tantalum, tin, gold or tungsten) that originated in the Democratic Republic of the Congo (DRC) region, if those minerals are 'necessary to the functionality or production of a product' manufactured by those companies. The rule is meant to exert pressure on companies not to deal with a region plagued by atrocious human rights violations. The goal is laudable, but the means to accomplish it are inconsistent with the core mission of the SEC; namely the protection of investors. The result is a massive supply chain due diligence effort by practically every US company that makes something so that they can report on a special SEC disclosure form whether they are using minerals sourced from the DRC. The hard and soft costs of compliance (effective May 2014) are significant, and the perceived benefits are indeterminable. Another such requirement is the controversial pay ratio rules mandated by the Dodd-Frank Act. These would require public companies to calculate and disclose the ratio of its CEO's annual compensation to the median total compensation of all employees in the company. These types of disclosure rules add a new layer of disclosure obligations designed not with a view toward adding meaningfully to the mix of information available to investors, but rather to act as a catalyst for social change.

The prognosis for today's epidemic of information overload is good, but given the scope of the staff 's disclosure reform project and everything else on the SEC's 2014 agenda, it may be years before we see a cure. In the meantime, public companies can forge their own path by following the most simple principles when writing public disclosure: tell the truth, tell the whole truth, tell it clearly, and tell what it means. Investors will get more from less.

Originally published in the May 2014 issue of International Financial Law Review.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions