“Modernizing” Sec Disclosure – More Transparency, Accountability?


The Securities and Exchange Commission recently published a lengthy “Concept Release”1 asking for public comment about whether the business and financial disclosures required in periodic reports and registration statements by Regulation S-K continue to provide meaningful information to investors. The Release is part of the SEC’s response to JOBS Act’s directive that the Commission update and modernize the disclosure regime, leveraging advances in technology to reduce companies’ costs and increase efficiency.

The Release seeks comment on: (i) the definition of “material information”2 which must be identified and disclosed by management to comply with the Securities Act and Exchange Act objectives; (ii) Regulation S-K line items3; and (iii) more extensive disclosure about environmental, social and governance (“ESG”) matters.

What has been particularly controversial has been the Release’s discussion point about moving from quarterly to semi-annual or other less frequent Exchange Act reporting for smaller reporting companies or companies not listed on a national securities exchange.4

The argument is that quarterly reporting feeds management short-term thinking. Projects with long-term potential are not pursued because executives focus on activities which maximize consistent quarter to quarter earnings. In addition, Semiannual reporting would reduce management time and financial compliance burdens.

Such considerations are behind the UK’s 2015 move from quarterly to semi-annual reporting, prominent wall street lawyer Martin Lipton’s proposal to let boards decide whether to report quarterly or semiannually5, and criticism of “quarterly capitalism” on the campaign trail.6

But is there any basis to believe semiannual reporting would actually increase the number of 5-year projects, or reduce the temptation to smooth earnings, and might lengthier “dark” periods increase insider trading? 7

Despite the views that, for example, increased 4 business day Form 8-K disclosures will fill the information gap, or that the market is the best determinant of reporting frequency8, the concern remains that semiannual reporting would make company information less transparent, and make it harder for analysts and investors to compare the financial performance of industry competitors reporting on semiannual vs. quarterly schedules.

Especially in the case of smaller public companies, which are followed by few if any analysts, the lower compliance burden of semiannual reporting must be weighed against reduced information transparency, and the potential for reduced liquidity in the form of increased bid-ask spreads, and increased cost of capital.

One approach to balancing compliance burdens with transparency which seems reasonable is for companies to file detailed annual and semiannual reports, supplemented with two “streamlined” quarterly reports highlighting material changes in revenue and earnings.9

Comments on the Regulation S-K Concept Release are due by July 21, 2016. It will be interesting to see how far SEC is prepared to go in “modernizing” the core securities disclosure regime.


In an attempt to reduce perceived financial disclosure “overload” – redundancy, excessive complexity – the Financial Standards Accounting Board (FASB, an organization subject to SEC oversight) has proposed a rule10 which would change the definition of “materiality”.

Current accounting standards require corporations to make financial disclosures of information that “could” influence investors.

The proposed rule would change the current FASB definition of materiality to track the Supreme Court’s definition.11 Companies would be required to disclose information only when there is a “substantial likelihood” that the information “would” significantly alter investor decisions.

This gives businesses more discretion by raising the bar significantly for disclosure of accounting matters.  However, it is likely to be seen as taking accounting disclosure out of accountants’ and auditors’ hands and placing it with lawyers who may, and in most instances will lack the necessary expertise in the area.

FASB announced that it would reconsider its proposal after receiving significant criticism from investors and financial analysts.

* * *

The FASB materiality proposal and the reaction to it highlights the tension between the preparers (companies, auditors), and the users (investors, financial analysts) of financial statements, as the SEC tries to address “modernizing” disclosure, and the effect on transparency and accountability. This tension is likely to increase if and when semiannual reporting is adopted.

  1. Securities and Exchange Commission, Concept Release Nos. 33-10064; 34-77599; File No. S7-06-16; Apr. 13, 2016; https://www.sec.gov/rules/concept/2016/33-10064.pdf
  2. As defined by the Supreme Court information is “material” if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
  3. Company business information (Items 101 and 102), performance (Items 301, 302 and 303), and risk (Items 305 and 503), securities (Items 201, 202, 701 and 703), industry guides, and exhibits (Item 601).
  4. “Frequency of Interim Reporting” Concept Release at p. 280 et seq.
  5. See D. Benoit, “Time to End Quarterly Reports, Law Firm Says”, The Wall Street Journal, Aug. 19, 2015,; http://www.wsj.com/articles/time-to-end-quarterly-reports-law-firm-says-1440025715.
  6. R. Pozen and M. Roe, “Those Short-Sighted Attacks on Quarterly Earnings”, Harvard Law School Forum on Corporate Governance and Financial Regulation, Oct. 8, 2015,
  7. Id.
  8. Id., Com. 2.
  9. Id.
  10. FASB Exposure Draft, “Proposed Amendments to Statement of Financial Accounting Concepts”, Sept. 24, 2015


  11. 11. Fn 2, supra.