As the rulemaking body responsible for corporate disclosures, activities undertaken by the Securities and Exchange Commission (SEC) are constantly on the radar for public companies and their boards. Particularly in the past six years since the passing of Dodd-Frank, executive compensation and corporate governance professionals have kept a keen eye on a consistent stream of disclosure policies that have changed the face of their annual proxy statements and financial filings. Of course, the SEC’s role of optimizing the flow of information between companies and investors also involves cutting back on unnecessary or outdated disclosures. C-Suite sat down with Keith Higgins, whose division is leading an initiative to evaluate the effectiveness of current company requirements, in order to discuss the process and the potential changes on the horizon.
Keith Higgins: Since coming to the Commission, the Chair has an agenda of finishing up the work on JOBS Act and Dodd-Frank mandates. I’m happy to report that the Commission completed the JOBS Act mandates, and in the area of Corporation Finance, the Commission proposed everything we are required to under Dodd-Frank mandates, which you mentioned.
In addition to the mandated acts, we also have made advances on some things the Chair wanted to consider—one of which was the disclosure effectiveness initiative, and I was very keen to take that up. The Division of Corporation Finance is focused on disclosures, and we really wanted to examine our disclosure system. There are a lot of people saying it could be better, investors are saying it could be better, companies are saying it could be better. They may come at it from different directions, so we are taking a look and are engaged in an exercise of updating and modernizing and taking a look at what’s there and what’s not there.
Higgins: We prescribe disclosure rules that companies are required to follow and provide the information upon which billions and billions of dollars worth of securities trade and investors make investment decisions. In other words, the information our rules require to be disclosed is pretty important.
When I hear people express surprise that we’re undertaking it, it seems to me that that’s exactly what federal agencies should be doing—taking a look at the rules they’ve mandated and whether those rules are still serving their purpose.
Higgins: Recognizing it’s a big undertaking, we started first looking at the business and financial information that companies are required to provide in their periodic reports. We put in “Phase Two” the compensation and governance related information, not because we don’t think that’s important, but we made an initial analysis that you can’t do everything at one time. And those rules had been addressed more recently and more frequently than the business and financial information.
With that in mind, there are three things we’ve done so far.
First, we issued a concept release on financial information of entities other than the company, things like financial statements required in acquisitions or financial statements required by guarantors or other entities.
Next, we put out a concept release on business and financial information and stockholder information—things that go into periodic reports. We also teed up a lot of issues, asked a lot of questions, and are trying to elicit investor and issuer feedback. And we asked how information gets delivered or how can it best be delivered to investors that makes it more navigable and usable and easier for them to digest.
Finally, in June, we put out a proposal that we call our technical release—disclosure update and simplification. This really takes a look at a lot of our rules that have built up over the years that have in some instances been superseded by changes to U.S. GAAP (generally accepted accounting principles). In some instances, they’ve been outdated—for example, there are all sorts of references to the public reference room at the SEC where people could come and read reports. There is a small room in the library, but it is not really used much anymore since people have access to the reports online. The Commission also proposed that we remove the stock price table, recognizing that investors probably don’t go to the 10-K of a company to look at what the stock has done over the last eight quarters. That’s also been supplanted by the internet.
Higgins: That’s right. The proposal is to increase the threshold from $75 million to $250 million. The comment period is open and we’re looking for feedback. Compliance burdens may fall disproportionately on smaller companies, so we want to examine if there are ways we can ease the burden while still providing access to all material information for investors.
In the compensation realm, for example, you don’t have to do a CD&A, you’re only required to have three executives in the summary compensation table, and for smaller companies that may be all that’s necessary.
Higgins: The $75 million threshold is 10 years old—it’s not that old, but has been around since about 2007. We have an advisory committee on small and emerging companies that meets quarterly, and they’ve had that on their agenda, to provide increased access to scaled disclosure. When it comes down to it, $75 million of market float is a really small company, and they thought that the benefits of scaled disclosure should be extended. It’s hard to know what the right number is, but $250 million was the recommendation we had from the advisory committee and the government small business forum.
Higgins: Shareholder engagement has been a big change since I’ve been practicing law, and even more so in the last half a dozen or so years. Engagement by shareholders has become increasingly important, whether it’s institutional investors, such as mutual funds, that have taken a greater interest in making improvements in how they engage with their companies, or whether it’s activists or other parties. Direct engagement by institutional investors is up, and shareholder proposals—which my division administers—have become more active. At times, it’s controversial, but it is a way that shareholders can engage with companies they own.
I certainly believe, and again speaking for myself, shareholder engagement is a good thing, but generally as an agency, we don’t take sides. The SEC mission and priority has always been to provide investors with the information that they need to make informed voting and investment decisions.
Higgins: We definitely observe what’s going on in the shareholder proposal process. But I don’t think just because something gets on the ballot and gets voted on necessarily means broader rulemaking is required. Proxy access is a great example where success through the shareholder proposal process has caused companies to decide they would go ahead and do it on their own.
We are mindful that what investors are looking for is not a static concept, and it’s evolving. As new investors enter the marketplace, and as the millennial generation starts making investment decisions, the kinds of information they consider significant in voting and investment decisions could be very different than was the case 30 years ago.
Back to our disclosure effectiveness project, we are interested in getting feedback in our concept release about what the investor of today, and more importantly—as we want to build a system that will last for quite a long time—the investor of the next 10 years, 20 years, finds important and significant.
That’s why we’re looking at topics as wide ranging as sustainability and other governance related items that increasingly, in my observation, are important to a broader range of investors than was the case even 10 years ago. But we’re also mindful that compliance doesn’t come without a cost, so similarly we’re looking at scaled disclosure.
Higgins: As a going-in proposition, the staff doesn’t believe that disclosure will change materially, but it will streamline our rules and make the task of putting together our reports easier.
We have been encouraged in the division on voluntary efforts companies are making. They are realizing they can avoid repetition, and streamline without losing any material. I’d encourage readers to follow Mark Twain’s rule—if I’d had more time, the letter would have been shorter. Spend a little more time on it, make it better, and probably you can make it shorter as well.m