U.S. securities regulators are reviewing whether public companies overwhelm investors with “information overload” and should instead streamline disclosures about financial data, executive pay and dozens of other issues.
Securities and Exchange Commission Chairwoman Mary Jo White did not reveal specific reforms in a speech on Tuesday, but said the SEC would release the results of a study into the federal rules governing corporate disclosures “very soon.”
“I am raising the question … as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us,” White said before the National Association of Corporate Directors.
“We must continuously consider whether information overload is occurring as rules proliferate and as we contemplate what should and should not be required to be disclosed going forward.”
In a wide-ranging speech about corporate America’s reporting rules, White raised questions about whether certain disclosures are duplicative, obsolete or should be tailored to be more industry-specific to sectors such as mining.
She touched on numerous disclosures ripe for review, from historical share closing prices and the ratio of earnings to fixed charges, to litigation risks, cyber security attacks, and executive compensation, among others.
White’s comments come as the SEC works to complete a mandated study of the financial reporting rules for all public companies to see if changes are warranted.
That regulatory regime, known as Regulation S-K, requires companies going public to register their shares and routinely disclose financial results and material facts about the company, as well as other information.
The study is required by a 2012 law that relaxes securities regulations to help smaller emerging companies go public and raise additional capital.
Although the bulk of the law is geared toward helping small business growth, the inclusion of the study signaled that Congress wanted the SEC to look beyond small companies and consider the rules for all public companies.
White said the study will only be the first step toward a broader review of the reporting requirements.
Among questions she said the SEC should ask include “whether there are specific disclosure requirements that are simply not necessary for investors or that investors do not want.”
For instance, she said the rise of the Internet and social media means investors can more readily access information required in financial reports, such as dilution disclosure, the ratio of earnings to fixed charges and historical share prices.
White’s speech on Tuesday elicited positive feedback, both from trade groups that represent companies and from groups representing the interests of large institutional investors.
“Chair White’s panoramic approach to disclosure overload makes sense,” said Amy Borrus, a deputy director at the Council of Institutional Investors.
“Longer isn’t necessarily better. Plain-English, well-organized discussions that highlight key facts and areas of interest concisely are more valuable-to companies and their shareowners-than a jargon-laced data-dump.”
Tom Quaadman, a vice president at the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said his organization has raised many of White’s concerns for years.
“We have seen a constant creation of disclosures, some of which may be irrelevant and immaterial to the needs of users,” he said. “This has created an overload that has disenfranchised retail shareholders and forced investors to sort through the clutter at their own peril.”
Too Much Information?
Several areas that White highlighted on Tuesday involve issues that companies have often complained about, such as duplicative reporting requirements.
In the case of litigation risks a company faces, for example, White said the information is often repeated in multiple documents.
“We should simply figure out what investors want and whether such repetition is really such a burden for companies. Perhaps more importantly, we need to ask whether we need to harmonize these requirements,” she said.
It is unclear what reforms may come out of the SEC’s study, and whether the SEC will have the bandwidth to tackle a financial reporting overhaul.
It is already struggling to complete numerous requirements of the 2010 Dodd-Frank Wall Street reform law.
In her speech, White also touched on some of the corporate governance rules mandated by Dodd-Frank, including a regulation that requires companies to let shareholders cast non-binding votes on executive compensation.
She said executive compensation disclosure requirements have been revised numerous times over the years, and now can amount to more than 40 pages.
The length is due, in part, to supplemental filings accompanying the data that companies often use to explain the rationale behind the compensation, she added.
She did not specifically call for reforms in this space, saying the disclosures “are a good thing.” At the same time, however, she also warned “we should be careful not to have too much of a good thing.”
Speaking to reporters on the sidelines of Tuesday’s event, she also elaborated on her views on cyber security disclosures.
In 2011, amid a rash of security breaches at major U.S. companies, the SEC issued guidance meant to help companies decide when it is appropriate to disclose such attacks.
Since then, some experts have said the guidance lacks teeth and called for strict reporting rules amid concerns companies are still failing to disclose attacks.
But White said she does not see a need for mandated reporting on cyber attacks.
“At this point I don’t see a need for a rule,” she said. “We are pleased with the guidance and what has flowed from the guidance.”