CLS Blue Sky Blog

Davis Polk discusses the SEC’s Proposed Disclosure Reforms

On July 13, the Securities and Exchange Commission issued a proposal aimed at eliminating or updating duplicative, overlapping and obsolete disclosure requirements. The proposal is welcome, but largely technical in nature and generally focused on duplicative requirements. As a result, if adopted, it will likely have only a small impact on the total amount of information companies are required to disclose. Needed reforms that would eliminate truly obsolete disclosure requirements will likely wait for the outcome of action on the SEC’s pending Regulation S-K concept release (our client memorandum and summary are available here and here).

The proposal is part of the SEC’s ongoing “disclosure effectiveness initiative,” launched in 2013, in which it articulated the overarching goal of improving the public company disclosure requirements for the benefit of both investors and companies. The proposal is also part of the SEC’s efforts to comply with the mandates set forth in the JOBS Act of 2012 and the FAST Act of 2015, both of which instructed the SEC to analyze Regulation S-K to determine how its disclosure requirements could be modernized and simplified, and to propose revisions to these requirements. The proposal is the fourth major work product of the disclosure effectiveness initiative, following the publication last month of proposed rules to modernize mining disclosures (our client memorandum is available here), the publication in April 2016 of the Regulation S-K concept release and the publication in September 2015 of a request for comment on financial disclosure requirements for entities other than the registrant (our comment letter is available here).

The comment period will close 60 days after the proposal’s publication in the Federal Register (the deadline is expected to be in the second half of September 2016).

Duplicative Requirements

The SEC identified a number of requirements in Regulation S-K and Regulation S-X that require substantially the same disclosure as U.S. generally accepted accounting principles, International Financial Reporting Standards or other disclosure requirements. The SEC proposes to eliminate those requirements to simplify compliance efforts while providing substantially the same information to investors. In particular, the amendments, if adopted, would eliminate duplicative disclosure requirements relating to:

Overlapping Requirements

The SEC also identified disclosure requirements in its rules that are related to, but not the same as, U.S. GAAP, IFRS or other disclosure requirements. The SEC is seeking comment on whether to delete these disclosure requirements or integrate them into the overlapping requirements. The SEC is also soliciting comments as to whether disclosure requirements that overlap with, but require information incremental to, U.S. GAAP should be retained, modified or referred to the Financial Accounting Standards Board for potential incorporation into U.S. GAAP. The proposal includes amendments to the SEC’s disclosure requirements that would:

Some of the proposed streamlining efforts would result in the relocation of disclosures within a filing. The SEC is seeking comments on the following potential concerns:

Obsolete Requirements

The SEC also identified disclosure requirements that have become obsolete or superseded as a result of the passage of time or changes in the regulatory, business or technological environment. The proposal, if adopted, would simplify compliance efforts by reducing or eliminating these obsolete requirements, including the following:

The SEC also proposes to codify its approach to permitting a foreign private issuer to file a registration statement on Form F-1 if the audited financial statements are not older than 15 months at the time of the filing (as opposed to the 12-month requirement that would otherwise apply) without the need to submit a waiver request. Under current rules, a waiver request is required, but in our experience it is always granted.

This post comes to us from Davis Polk & Wardwell LLP. It is based on their memorandum, “SEC Proposes Additional Disclosure Reforms,” dated July 19, 2016, and available here.

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