Regulation S-K Financial Disclosure Requirements- The Financial disclosure requirements in Regulation S-K, issued by the SEC on April 15, 2016.
The S-K Concept Release contains hundreds of multi-part questions and requests for public input. In general the SEC discusses and seeks comment on:
• Whether specific disclosures are important and useful to making investment and voting decisions and whether more, less or different information is needed;
• Whether revisions to current requirements could enhance information provided and promote efficiency, competition, and capital formation;
• Whether revisions could enhance investor protections;
• Whether current requirements properly balance the costs and benefits of required disclosures;
• Whether changes could lower costs by utilizing advancements in technology and communications;
• Whether access to disclosure could be improved by modernizing methods used to present, aggregate and disseminate information;
• Challenges with the current disclosure regime; and
• the best way to implement changes, such as through temporary rules and sunset provisions which have a waterfall implementation schedule
The Concept Release is exactly as described—a “concept release” and not a rule-making release—it contains extensive discussion on the disclosure regime concepts. Logic dictates that in order to properly evaluate the efficacy of any changes to Regulation S-K, one must understand the concepts behind and purposes of the disclosure laws.
At the highest level, the purpose of disclosure is to provide investors and the marketplace with information needed to make informed investment and voting decisions. It is thought proper disclosure “may lead to more accurate share prices, discourage fraud, heighten monitoring of the managers of companies, and increase liquidity.” Further, effective disclosure should “increase the integrity of securities markets, build investor confidence, and support the provision of capital to the market.”
However, the requirements must be balanced against the costs to the company making the disclosure, including issues with disclosing sensitive trade secret information to competitors. To address confidentiality concerns the SEC has adopted rules and regulations related to confidential treatment for certain information. Moreover, excessive rote immaterial disclosure can dilute the material important information regarding that particular company and have the unintended consequence of weakening necessary disclosure to potential investors and the public trading markets.
To add to the complicated issue, the disclosure requirements must consider the different types and size of public companies. Smaller companies cannot bear the same disclosure expense as larger entities, nor should they be required to. Smaller companies tend to have less complicated operations and business models and can fully explain these operations in a simplified manner.
The disclosure laws must also consider the audience. In particular, investors, potential investors, and shareholders will use and analyze information differently from analysts, financial advisors and market makers. Investment bankers preparing for an IPO, analysts and institutional investors tend to prefer standardized information in machine-readable format that can be easily correlated and compared.
The disclosure laws, and the SEC discussion, understand that the cornerstone of the system must be materiality.
Laura Anthony, Esq.
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