Experts speak on what’s driving SEC disclosure reform

With multiple releases related to disclosure in 2016, the SEC opened up a controversial can of worms. Five experts give their opinions about the Commission’s proposals.


Vintage question > How effective do you think the disclosure changes proposed by the SEC would be in achieving more efficient disclosure processes? And more generally, which specific areas of disclosure do you think are most in need of reform?

Broc Romanek > These are just concept releases right now, and when the SEC has a really big project, they do a concept release even before the proposing release. That’s what is happening here, and what that means is that this a multi-year project – in fact, it might be a decade- long project.

What will probably happen is that there will be proposals regarding small, niche areas, since that is really the only way for an agency to approach rule- making of such a large scale like this. The reason is that if the proposal is too big, there will be some controversial parts that will cause it to stall, particularly because the rule-making of any federal agency can now become politicized. Federal agencies also need to go through a cost-benefit analysis now, which by itself requires an agency to do a lot more homework before they propose and then adopt a rule.

As for which areas I think are most in need of reform, in my opinion there are two main high-value things investors are looking for. One of them is what I would call “straight talk.” This is the way Warren Buffett writes for Berkshire Hathaway – his annual report is very popular because it’s straightforward, written in a conversationalist style. I believe he writes it himself – it’s definitely not the CEO’s lawyer writing it – and he’s telling it like it is. He’s one of the only people to do it, and that is something that investors clearly want but CEOs aren’t doing.

v-redthe-irwhitepaperThe second valuable type of information that investors are really looking for is forward-looking information. Again, even though there is safe harbor in the securities laws to protect companies from liability to some extent, there is still some risk. In hindsight, if some forward- looking disclosure is wrong, a company can likely get sued if the stock price falls. So there just isn’t that much forward- looking information, and analysts and investors have to find other ways to do their homework on companies. Part of that forward-looking information, and part of what Warren Buffett writes about, is strategy. Strategy is part of these first two things that I mentioned – people want companies to talk more clearly about what their strategy is for the future.

There you also have competitive harm concerns – you don’t want to tip off your competitors regarding your strategy. But those are really the things that could probably boost disclosure the most. These are all high-level, but I think any reform should start at a high level and say, “Okay, what do people really want to read?” A lot of the disclosure we’re getting is really secondary and not market-moving information.

Anna Pinedo > I think the rule changes proposed by the SEC would be very effective in improving disclosures and making them more user-friendly and transparent. Eliminating outdated disclosure requirements, such as the need to include the registrant’s stock price performance and certain financial ratios, would also be a useful step I think. Similarly, I think it’s useful to eliminate repetitive disclosures that could be contained in one static “company document.” In my opinion, the areas most in need of attention are the risk factors section and the MD&A section.

Risk factor disclosure has become so lengthy so as not to be helpful to a potential investor. Registrants and their counsel are appropriately concerned about mitigating the risk of future litigation and respond to their concerns by including within the risk factors section numerous risks, including some generic risks, which may affect the registrants’ businesses and financial results. However, many registrants and their counsel choose to over-disclose.

While some commenters may observe that the length of risk factors or the number of risk factors does not pose a concern for potential investors, I believe that the disclosures may become so lengthy that a retail investor may have difficulty identifying those risks that are truly significant.



Erik Bradbury > We’ve done a lot of work in this space over the past few years, including in two recent responses to the SEC releases. By way of background, the FEI has a number of technical committees, the most prominent of which is the Committee on Corporate Reporting (CCR), and it is made up of approximately 45 of the Fortune 100 principal accounting officers, controllers, and other financial executives. To give you an idea of the magnitude, they collectively represent about US$5tn in market capitalization – so it’s a big group.

Our point of view is that we’re supportive of the SEC’s initiatives to review and improve disclosures for the benefit of investors. We feel that the SEC should focus on three areas. The first of these is the need for a principal-based framework. It’s our view that a principle-based framework that is appropriately designed with clearly stated objectives provides the best foundation to deliver decision-useful information to investors and users of financial statements. That was one of the questions asked in the concept release.

Another point we make is that materiality is a key component of this. It should be the primary consideration for determining what gets disclosed and to what extent. What does that mean? It means that bright-line disclosures are unnecessary. Materiality should be the basis for disclosing certain things, and bright-line disclosures don’t consider materiality at all. In some cases, they force companies to disclose things that they otherwise wouldn’t but are clearly immaterial to investors overall.

We also believe that disclosure should be flexible. In general, if you have a flexible disclosure that’s based on meaningful material factors for a registrant’s industry and business, that provides the framework for which a company can disclose information in the most effective way possible. MD&A is a good example of this – MD&A is rather flexible in terms of how companies are able to describe their businesses, and it has arguably stood the test of time.

And lastly, but importantly, we encourage the SEC to continue encouraging registrants to voluntarily improve their disclosures.

Dan Hanson > I’m an active manager of publicly traded equities, and as a fundamental investor I primarily do bottom-up research. I focus on a company’s business operations, and corporate disclosures are a really important part of that. As an investor, there’s no question that there is an issue of information overload, which creates a big burden for reporting companies and users of financial statements alike. The challenge for investors is to figure out what is relevant, which can be like searching for a needle in a haystack.

On the other side, issuers are often motivated by a concern about legal implications of disclosure. So it’s like entropy – you have perpetually more disclosure, without ever any roll-back. So the challenge is to balance the tension of having a good regulatory framework for required disclosure but also step back and allow management to really curate what they think is relevant and present a more concise view of what is material to their business, which will allow the investor to key in on those issues.

Regarding the SEC’s current initiative, I would cite the explosion of comments they received and say that they clearly struck a nerve. There was a huge volume of comments and they were highly substantive. Interestingly, some of them actually came from other government agencies, such as the EPA, as well as from many lawmakers. Some of the dialogue the SEC has had revolves around going to a uniform set of disclosures across government, and there could be a real harmony and elegance to that, in principle.



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