United States: A Lofty Concept: Disclosure Effectiveness

Even before the JOBS Act had been proposed, policymakers focused on the downturn in the number of initial public offerings (IPOs) speculated that the burdensome disclosure requirements applicable to public companies were deterring private companies from undertaking public offerings. A number of market participants, including even a few then-Commissioners of the Securities and Exchange Commission (the "Commission"), noted that the disclosures contained in IPO prospectuses, as well as those contained in Securities Exchange Act ("Exchange Act") filings, had consistently become longer in recent years. Then-Commissioner Paredes noted that disclosure overload brought with it the possibility that investors might no longer be able to identify the information that was material to an investment decision amidst pages of generic or repetitive text. In an effort to jumpstart the IPO market and reduce the regulatory burdens for IPO candidates, Title I of the JOBS Act (the "IPO on ramp" provisions) required that the Commission produce a report to Congress examining the requirements of Regulation S-K with a view to modernizing and simplifying the registration process for emerging growth companies (EGCs). The SEC Staff's 2013 report identified a number of guiding principles that should inform a review of the effectiveness of disclosure requirements. Paramount among these is the notion of promoting investor confidence in the reliability of public filings through enhanced transparency, while encouraging capital formation. These and other objectives have been at the center of the Commission's "Disclosure Effectiveness" initiative, which has been underway since 2013. Last week, the Commission took another step toward furthering its review of Regulation S-K requirements by voting to issue a Concept Release requesting comment on the business and financial disclosures that public companies provide in their Exchange Act filings.1 The release specifically does not comment on the other disclosure requirements of Regulation S-K, such as corporate governance or compensation-related items, or the required disclosures for foreign private issuers, business development companies or other types of registrants.


Given the public availability of information, investors are assumed to have access to disclosures made by reporting issuers—whether that disclosure is contained in filings made pursuant to the Securities Act of 1933 or the Exchange Act. Disclosures required pursuant to the Securities Act and the Exchange Act are coordinated through an integrated disclosure system. For U.S. domestic issuers, the required non-financial disclosure items are set forth in Regulation S-K, and the required financial disclosure items are set forth in Regulation S-X. In 1977, the Commission took its first step toward establishing an integrated disclosure system when it adopted Regulation S-K. Regulation S-K provides a single set of instructions to be used by registrants under the Securities Act forms, as well as the Exchange Act forms. Despite its significance, Regulation S-K has only been updated a few times since its adoption.

In the Concept Release, the Commission seeks comment on, among other things, whether the current requirements appropriately balance the costs of disclosure with the benefits, how disclosure requirements could be improved in order to enhance the information made available to investors, whether there are tools or approaches that can modernize the methods of presenting disclosures such that these are adaptable to changes in market conditions and advancements in technology.

In addition to requesting comment on various specific line items of Regulation S-K, as we note below, the Concept Release poses some fundamental questions regarding disclosure matters.

  • Principles-Based Disclosures or Prescriptive Disclosures: The Concept Release raises the age-old "principles-based" versus "prescriptive" disclosure question. Currently, much of the information called for under Regulation S-K is principles-based and relies on the issuer's assessment regarding materiality of the information in the context of the issuer's business and financial condition. In considering "materiality," the Commission has accepted the Supreme Court's view that information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or how to make an investment decision. Information is material if there is substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information available. Of course, materiality determinations inevitably involve judgment and, as a result, may be difficult to apply, and application may lead to disclosures that are inconsistent from issuer to issuer. The release notes that there are other requirements under Regulation S-K that incorporate objective, quantitative thresholds or require that issuers disclose information in all cases. The use of prescriptive disclosure requirements is characterized as resulting in greater consistency and comparability among filings, which may be useful to investors, and in the case of some matters, even enables software to track and report these differences. The release solicits input on the most effective approach as between principles-based and prescriptive disclosure requirements and offers up a third concept, "objectives-based" disclosure requirements, for consideration.
  • Investor Sophistication: The Concept Release asks an important question that often is the very first question we ask when we are writing a memorandum or an alert: in crafting disclosures, what level of sophistication should be presumed of the reader? As the release notes, the answer to this question affects not only the level of detail that is required to be disclosed and the type of information that is shared, but it also affects where (in which documents) the disclosure should be contained, the manner in which the disclosure should be required to be furnished (such as through cross-references, hyperlink or incorporation by reference) and the presentation of the information. Given technological advancements and the rapid accessibility of information, there is good reason to provide more flexibility for issuers in terms of how and where information is presented. In recent years, there have been a number of studies published by government agencies (some were required by the Dodd-Frank Act) regarding financial literacy and the way in which investors review and react to disclosures.2 These studies appear to suggest that investors prefer disclosures that are clear and concise, incorporating bullet points, tables, charts and other graphic presentations. Investors also appear to have a preference for "layered disclosure," in which different formats (and amounts of text) co-exist for the benefit of different types of investors.
  • Core Company Business Information: Item 101(a) of Regulation S-K requires a description of the general development of the business of the registrant during the past five years or such shorter period as the registrant may have been engaged in business. The release requests comment on whether this information is available elsewhere, whether the requirement is still useful for registrants with a reporting history, whether a more detailed discussion should be required every few years and whether the disclosure should contain a discussion of the registrant's strategy or focus on changes that have occurred in the business. The release also asks whether, with respect to Item 101(c), any additional specific disclosures should be required.
  • Scaled Disclosures: Scaled disclosures are available to smaller reporting companies (SRCs), and the JOBS Act made certain disclosure accommodations available to EGCs. Since enactment of the JOBS Act, market participants have urged the Commission Staff to review the scaled disclosures for SRCs in light of the EGC accommodations. Also, proposed legislation has been introduced that would redefine the filer categories (i.e., accelerated filers, non-accelerated filers, etc.) for various purposes, including in order to provide some relief from disclosure requirements that are perceived as potentially burdensome. The FAST Act also directs the Commission to revise Regulation S-K to further scale or eliminate disclosure requirements in order to reduce the burden on SRCs, EGCs and accelerated filers, while still providing all material information to investors. The release requests input on various issues related to scaled disclosures.
  • Frequency of Disclosures: The release addresses the current debate regarding "short-termism" by acknowledging the possibility that quarterly disclosure requirements may lead the management of public companies to focus on near-term results rather than long-term investment. The release requests comment regarding the benefits or disadvantages associated with quarterly reporting, whether the reporting requirements should be different for different types of companies (i.e., for SRCs, EGCs, etc.), whether there would be significant savings or benefits associated with semi-annual reporting and some quantification of these costs.
  • Cross-References, Hyperlinks, Layered Disclosures and Other Presentation Issues: The release solicits comments on the presentation of information and the extent to which tools or approaches can be used that would make information more accessible and reduce repetition and disclosure of immaterial information. The release discusses the use of cross-references, reliance on incorporation by reference, use of hyperlinks (including links to information that may be provided on company websites), use of standardized formatting (including standardized charts, tables, Q&As, etc., in order to promote comparability) and layered disclosures.

Specific Areas of Focus

In addition to addressing and seeking comment on some overarching disclosure principles, the Concept Release also addresses a number of specific disclosure requirements, reviews the underpinnings of the current requirements and solicits input on potential areas of improvement that would provide more meaningful information for investors while not burdening issuers. We highlight below a few of the more important areas covered by the release:

  • Financial Information and the MD&A: The release discusses the Item 301 selected financial data requirement, and asks whether this information is repetitive of information that is otherwise available to investors or whether there is utility to the data as it may highlight trends. Item 302 requires disclosure of certain quarterly data as to which the release solicits comments. The release also discusses the Commission's guidance over the years on the objectives of the MD&A section, the use of an executive-level overview and the types of trend data that the Commission has sought. In this regard, the release requests comment on various matters, including whether the sources of Commission guidance on MD&A should be consolidated, whether a different format or presentation should be required and whether auditor involvement should be required. The release also solicits comment regarding the current "two-step" guidance for determining whether forward-looking information is required in MD&A. As to results of operations, the release asks whether period-to-period comparisons should be retained, eliminated or modified; how the results of operations disclosures can be improved; and whether the three-year comparison provides material information that would not be reflected in prior period filings. The release also requests comment on the liquidity and capital resources disclosures (Items 303(a)(1) and (2)), off-balance sheet arrangements (Item 303(a)(4)), contractual obligations (Item 303(a)(5)) and critical accounting estimates (Item 303).
  • Risks and Risk Management: The release asks whether all risk-related disclosures required to be included in a report should be consolidated and whether this would improve the quality of the information. This is an interesting approach and, in fact, in grouping in its Concept Release all of the "risk-related" items under a single heading and considering them together, the release seems to take a view. The release more specifically requests comment on whether and how registrants could be discouraged from including generic or boilerplate risk factors or risks common to an industry and instead focus on risks specific to the registrant and its business. Along these lines, the release asks for comment relating to additional requirements for specificity in the risk factors, more detailed discussion of context and the possibility of discussing the probability of occurrence of the factors identified in the section.
  • Line Item Requirements: The Concept Release also seeks comment regarding specific items of Regulation S-K, including disclosure requirements relating to intellectual property rights (Item 101(c)(1)(iv)), government contracts and regulation (Items 101(c)(1)(ix) and (xii)), employees (Item 101(c)(1)(xiii)), properties (Item 102), number of equity holders (Item 201(b)), description of capital stock (Item 202), recent sales of unregistered securities (Items 701(a)-(e)), use of proceeds from registered securities (Item 701(f)) and purchases of equity securities by the issuer and affiliated purchasers (Item 703).
  • Industry Guides: Consistent with the JOBS Act Regulation S-K study, the release solicits comments on the various industry guides and whether these guides require industry-specific information that is otherwise not disclosed and which remains useful to investors.
  • Exhibits: The release also seeks input on Item 601 of Regulation S-K related to exhibit requirements. In particular, the release focuses on whether schedules and attachments from filed exhibits should be omitted and under what circumstances, whether registrants should continue to be required to file amendments or modifications to previously filed exhibits, whether it is clear which contracts are entered into in the ordinary course and whether it would be helpful for the Commission to provide additional guidance to help registrants determine which contracts should be filed to the extent that the registrants are "substantially dependent" on these.

What to Expect

For many years, the SEC and issuers have struggled with how to best provide material disclosure to investors. In recent years, many issuers have undertaken initiatives to make their public disclosures more effective through the use of charts, tables, and other graphics. This trend is most evident in proxy statements, with many issuers having concluded that more effective disclosure of executive compensation and governance information provided a better platform for engaging directly with stockholders. Further, at the urging of the SEC Staff, numerous issuers have also sought to make the disclosure in their periodic reports and registration statements more effective, although the changes in these filings have been much more modest. One of the often-cited concerns in "voluntarily" paring back disclosures that may be immaterial, minimizing repetition, and deleting "generic" risk factors is that significant disclosure changes may open the door to potential securities litigation. The Concept Release now suggests a willingness on the part of the Commission to consider many of the basic underpinnings of Regulation S-K that could bring about meaningful changes to the ways in which public reporting companies share information with their stakeholders, and therefore represents one of the best opportunities in a generation to make some real progress in the way that public companies communicate with their investors.


1 Concept Release, Business and Financial Disclosure Required by Regulation S-K, Release No. 33-10064; 34-77599, available at: https://www.sec.gov/rules/concept/2016/33-10064.pdf.

2 See, for example, Study Regarding Financial Literacy Among Investors, as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, delivered by the Staff of the Commission, available at: https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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.

Anna Pinedo
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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.


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.