Section 108 of the Jump Start Our Business Startups Actrequired the

Study states more studies required - similar to a punt?
Photo by Duke University Archives

SEC to undertake a study of the disclosure requirements of Regulation S-K. Specifically, the statute mandated that the SEC shall:

conduct a review of its Regulation S-K to—

  1. comprehensively analyze the current registration requirements of such regulation; and
  2. determine how such requirements can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies.

In addition, the JOBS Act required that the SEC report to Congress its specific recommendations on how to streamline the registration process in order to make it more efficient and less burdensome for prospective issuers who qualify as emerging growth companies.

That report was released not too long ago on December 20, 2013. However, it seems like the Commission elected to punt on the second part of the legislative mandate (i.e., to provide specifics), at least for now. Unfortunately, as is so often the case with governmental studies, the primary recommendation by the SEC Staff was to conduct further studies and investigations.  While disclosure reform is complex (and may be politically charged), further studies is not what investors or the capital markets need.  Too much money is spent on preparing duplicative and meaningless disclosures.

The report describes in great detail the history and evolution of the disclosure requirements contained in Regulation S-K – the primary source of disclosure requirements for registration statements and periodic reports filed by public companies with the SEC. All of this is well and good for government regulation historians and SEC buffs, but it provides nothing of real value to companies that are or may become subject to these rules and requirements. However, the report provides no real useful guidance to Congress (which may be the point if the SEC would rather control the reform process itself rather than have Congress control the process). Presumably, Congress had included this section in the JOBS Act for a specific purpose: to get guidance from the experts in a complex and technical area of the law (or, more cynically, to call for the study to delay the need for any further action from Congress). Nevertheless, investors will soon receive many 100 page proxy statements to read and consider despite many complaints by investors of disclosure overload.

Instead of providing any meaningful guidance to Congress, the basic gist of the SEC’s recommendations at the end of the report were to further:

  • Review risk-related disclosures and evaluate possible alternatives;
  • Review requirements relating to a registrant’s business and operations;
  • Review corporate governance disclosure requirements;
  • Evaluate compensation disclosure requirements;
  • Review disclosure requirements relating to securities offerings;
  • Review the manner in which exhibit documents are made available to the public;
  • Review industry guides;
  • Review Regulation S-X; and
  • Review disclosure requirements in SEC rules and forms.

Apparently, the Staff did not have indisputable video evidence to overturn (or make a recommendation to overturn) the rules and regulations on the field. Instead, they recommended further review before taking any positions.

Granted, the SEC Staff has been inundated with rulemaking obligations from Dodd-Frank that are long overdue. But, one would have thought that at least some de minimis level of insight as to how these important corporate disclosure requirements might be improved could have been included in the SEC’s report to Congress. It is understandable that the SEC would want further third party input from the private sector on specific ways to improve the current regime (only five comment letters from the public were submitted), but at least the Staff could have given us a general overview on their initial thoughts on the issue at hand. Alas, we must wait until further review and analysis is completed to find out how current corporate disclosure requirements might change for the better in the future.

On the bright side, the press release that accompanied the study indicated that Chairman Mary Jo White had directed the SEC Staff to prepare specific recommendations, and this seems to be a priority item based on her recent public comments. However, it does not appear that the exact procedures for going forward have been formulated and there is no concrete time frame for completion of this undertaking.