At an open meeting, the SEC decided to issue a concept release for comments on modernizing certain business and financial disclosure requirements in Regulation S-K.
SEC Chair Mary Jo White asserted that the concept release (i) considers the history and purpose of disclosure requirements, (ii) establishes an accessible framework for achieving a better understanding of customers’ and investors’ experiences with disclosure requirements, and whether investors are receiving adequate information, and (iii) seeks broad input from all constituencies. Chair White stressed that the SEC’s work on disclosure effectiveness “obviously does not stop with this release.”
SEC Commissioner Kara M. Stein voted to support the concept release as a “step towards starting the dialogue on how to modernize and improve the [SEC’s] disclosure framework,” but argued that “it is only a tentative first step.” Commissioner Stein asserted that the Concept Release failed to address the following issues:
- the “fundamentally different” views of investors in 2016 as compared to those of investors from over 30 years ago, when the main requirements of Regulation S-K were adopted originally;
- the “antiquated” form-based system used by the SEC, and whether the Electronic Data Gathering Analysis and Retrieval system should be reimagined;
- whether SEC rules should be changed to address abuses in the presentation of supplemental non-GAAP disclosures, which may mislead investors, and to address other corporate governance and transparency issues;
- whether environmental, social and corporate governance measures should be required in company disclosures; and
- whether the disclosure regime should incentivize registrants to provide quality information to the market before allowing them the “privilege” of scaled disclosure.
SEC Commissioner Michael S. Piwowar expressed support for the concept release, but also opined that the SEC “has still not done enough to provide fair, efficient and robust capital markets.” Additionally, he emphasized the “pivotal role” of “materiality” in Regulation S-K examination by the SEC.
“Materiality” plays a pivotal role in understanding the disclosure obligations under the federal securities laws. It is not sufficient that information might merely be useful. Nor is it sufficient that only some investors might find a bit of information to be important. Rather, as Justice Thurgood Marshall wrote for a unanimous Supreme Court in the seminal case of TSC Industries v. Northway [426 U.S. 438, 445 (1976)], “[t]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.” This is an objective legal standard, not a subjective political one. While certain shareholders may have their own particular pet interests, the reasonable investor standard prevents an individual investor from hijacking corporate resources to serve their own specific agenda.
Commissioner Piwowar urged regulators to keep in mind certain requirements in the Fixing America’s Surface Transportation Act, which address the concerns first raised by Justice Marshall, when they implement subsequent Regulation S-K reforms. Commissioner Piwowar noted that these requirements instruct the SEC to (i) examine how information can be disseminated to investors by using a company-by-company approach that avoids the use of boilerplate language or static requirements, and (ii) explore methods for discouraging repetition and the disclosure of immaterial information.
Lofchie Comment: The fundamental debate between Commissioners Stein and Piwowar concerns the SEC’s social disclosure requirements, which Commissioner Stein claims will effect a “modernized disclosure regime [that addresses such matters as] . . . diversity and inclusion.” Commissioner Stein believes that “[t]oday, investors make their decisions based on an array of information, which goes beyond mere profit and loss” – a situation that in her view contrasts sharply with that of the past, when such social-value information “may not have been material to an investor at all in 1982.” The opposing view to Commissioner Stein’s is this the requirement to provide such information is not coming from investors at all and is being used primarily to further a political agenda.
The most reasonable way to respond to Commissioner Stein’s question is to allow the investors in any particular company to answer it. Let the company ask regularly in proxy statements whether its shareholders want it to make such disclosures. Presumably, the investors will vote either to mandate such disclosures, if they believe that the market finds them desirable, or against such disclosures, if they believe them to be a waste of corporate resources. It would not be surprising if investors in 2016 proved to be more similar than dissimilar to investors in 1982. That said, if the intent of Commissioner Stein is to allow investors to express their true selves, then she should allow them to vote according to their wishes.