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Update on Corporate Disclosure Reform
Tuesday, August 30, 2016

Now that summer has dwindled away and we’re all about to get back to work after Labor Day, let’s revisit one subject that may get more attention this fall: reform of corporate disclosure.

The Securities and Exchange Commission has a long-running project to reform the corporate disclosure regime, which has become quite onerous over the years. In April the SEC published a concept release on reform of Regulation S-K, which spells out all the non-financial data companies must report in SEC filings (description of business, Management Discussion & Analysis, Code of Ethics, executive compensation, and so forth). Last fall the agency published a similar call for comments about Regulation S-X, which governs all the financial data.

More recently, the SEC asked for comment specifically about sub-part 400 of Regulation S-K. That section deals with corporate governance issues, including executive pay—so clearly the SEC is sending a signal that it wants to devote some of its reform energies on those subjects.

(What’s the difference between a concept release and a request for comment, you ask? Formality and word count, mostly. The S-K concept release is more than 300 pages long and was published in the Federal Register. The call for comment about sub-part 400 was eight pages plus a press release.)

That’s a lot of call for comment, so we wanted to give Calcbench fans a recap of all the action.

Q: Is all this talk about disclosure reform for real? The Obama Administration is nearly over, after all.

A: That is a fair question. Suffice to say, the SEC putting more thought into disclosure reform now than it has in many years. Everyone agrees that the total volume of disclosure has ballooned, and much of it is either unnecessary, duplicative, or not useful to investors (either the human kind or the automated algorithm kind).

That said, we’re almost certain to have a new SEC chairman come Jan. 20, 2017, and that person might shift this project into slow gear. Presumably another Democratic administration will have similar thoughts about reform as the current one. A Republican administration will almost certainly be in favor of less disclosure, but how a new chair might put that into place is unknown.

Q: What are the important issues?

A: Pinpointing specific issues is tricky. A good way to think about it is to remember the SEC’s most important objectives: to protect investors, and to encourage healthy capital markets.

View the project through that lens, and a few issues rise to the top.

One is the question of non-GAAP financial metrics. All year long the SEC has been talking about the risks of using non-GAAP too often, and in May the agency published fresh guidance about what types of non-GAAP it does not want to see used. Beyond those rules, however (make sure the non-GAAP metric is useful, and reconcile it back to GAAP), companies can create and use non-GAAP as they believe best.

Might the SEC require non-GAAP data to be tagged in XBRL? Could it specify that some non-GAAP be required, and other non-GAAP be prohibited? We don’t know.

Another question is the balance between quantitative and qualitative disclosure. Quantitative disclosure is financial data, performance ratios, and the like; it can be easily measured, but doesn’t provide much context. Qualitative disclosure is more narrative, like the MD&A or the list of risk factors. Each kind of disclosure is useful to investors in its own way.

How much of each one does an investor need to make useful decisions? That’s what the SEC wants to answer.

Q: How long might this reform project take?

A: See our earlier note above, that the SEC is now talking more about disclosure reform than it has in many years. We simply don’t know how long it might take. Prior SEC commissioners have looked at disclosure reform too, and sometimes the agency has made piecemeal efforts to change requirements. (For example, in 2006 the SEC reformed disclosure of executive compensation data.) It’s entirely possible this project will not be completed before the new administration, just as it’s possible we might see some reform prior to that.

Q: What else is going on in corporate disclosure?

A: Lots, as always. The Financial Accounting Standards Board, for example, is working on several projects of its own. FASB just published an update on the Statement of Cash Flows, intended to reduce “diversity of practice” and normalize the numbers companies report. FASB is also working on a new standard for disclosure of government incentives—all those tax breaks governments give to get companies to work in their jurisdictions.

As FASB and others change the nature of what companies can disclose, ideally that should all get included in the SEC’s regime of what companies must disclose.

Q: OK, thanks for the briefing.

A: Enjoy your day.


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