SEC Proposes to Eliminate Outdated and Duplicative Disclosure Requirements
On July 13, 2016, the SEC issued a proposed rule1 that would amend certain of its disclosure
requirements that may be redundant, duplicative, or outdated, or may overlap with other SEC,
U.S. GAAP, or IFRS disclosure requirements. The proposal also seeks comment on whether
certain of the SEC’s disclosure requirements that overlap with U.S. GAAP requirements should
be retained, modified, eliminated, or referred to the FASB for potential incorporation into U.S.
GAAP. See the table below for a summary of some of the proposed changes.
The proposed amendments are the next step in the SEC’s ongoing disclosure effectiveness
initiative, which is a broad-based review of the Commission’s disclosure, presentation, and
delivery requirements for public companies. As part of the initiative, the SEC also issued a
concept release2 in April of this year that sought feedback on modernizing certain business and financial disclosure requirements of Regulation S-K as well as a request for comment3 last
September on the effectiveness of certain financial disclosure requirements in
Regulation S-X.4
The proposed amendments to the disclosure requirements would affect U.S. issuers,
foreign private issuers (FPIs), investment advisers, investment companies, broker-dealers,
and nationally recognized statistical rating organizations. The effect on each type of issuer
varies depending on the amendment proposed. The SEC intends to improve the disclosure
requirements and simplify registrants’ compliance efforts without significantly altering the total
mix of information that is ultimately provided to investors.
Editor’s Note
The implications of the proposal are likely to vary depending on the category of
change (e.g., duplicate, overlapping, superseded). The effect of some changes may
not be significant if their purpose is only to eliminate a duplicated or superseded
requirement. Changes to address overlapping requirements could have a more
significant effect since they can result in what the SEC describes as (1) disclosure
location considerations and (2) bright-line threshold considerations (see discussion
below).
The proposal's request for comment on overlapping requirements notes that “proposals
related to some topics would result in the relocation of disclosures from outside to inside
the financial statements, subjecting this information to annual audit and/or interim review,
internal control over financial reporting, and XBRL tagging requirements.” For example, the
requirements in Regulation S-K, Item 103,5 to disclose certain legal proceedings can in certain
cases be more expansive than those in U.S. GAAP, under which loss contingencies must be
disclosed. The Commission is seeking input on whether incorporation of Item 103, among
other requirements, into U.S. GAAP may impose greater burdens on issuers and auditors
related to the development and auditing of additional estimates and disclosures. The SEC also
notes that the location of some disclosures in a filing could change as a result of the proposal
to address overlapping requirements, which might affect users by changing the prominence of
the disclosures.
The proposal may result in the removal or addition of a bright-line disclosure threshold (i.e.,
a threshold below which no disclosure is required), which may change the disclosure burden
on issuers and the amount of information disclosed to investors. For example, unlike U.S.
GAAP, Regulation S-K6 requires disclosure of the amount of revenue from any class of similar
products and services that account for 10 percent or more of revenue.
Comments on the proposed rule are due 60 days after its publication in the Federal Register.
Constituent feedback will be critical to the success of the SEC’s disclosure update and
simplification initiative. The SEC has indicated that comments on the proposal and on the
Regulation S-K concept release will further inform the Commission’s actions related to
enhanced disclosure.
The proposal would affect a diverse group of SEC disclosure requirements. The following table
summarizes some of the proposed changes:
Types of
Requirements
Affected | Goal of Proposed
Changes | Examples of Affected
Disclosure Topics | Example |
---|---|---|---|
Redundant or
duplicative
requirements | Eliminate requirements
that result in disclosure
of substantially the same
information as that
required under other
Commission rules, U.S.
GAAP, or IFRSs. |
| Debt obligations:
Under Regulation S-X,7
registrants must disclose
significant changes in
issued amounts of debt
after the latest balance
sheet date. Because, the
guidance in U.S. GAAP
on subsequent events
(ASC 855, Subsequent
Events) requires similar
disclosures, the SEC
proposed to eliminate
the S-X related
disclosure. |
Overlapping
requirements | Eliminate requirements
that convey reasonably
similar information, or
information that is not
materially incremental
to that required under
other SEC requirements,
U.S. GAAP, or IFRSs and
that may no longer be
useful to investors. |
| |
Integrate certain
disclosure requirements
with other related
Commission disclosure
requirements. |
| Restrictions on dividends
and related items: A
number of Commission
requirements mandate
disclosure about
restrictions on the
payment of dividends
and related items.10
The SEC proposes
to streamline these
disclosure requirements
into a single requirement
to disclose material
restrictions on dividends. | |
Modify or eliminate
overlapping disclosures
or refer them to the
FASB for potential
incorporation into U.S.
GAAP. |
| Income taxes: Both
Regulation S-X and U.S
GAAP require disclosures
about income taxes.
However, Regulation
S-X requires additional
disclosures, such as the
amount of domestic and
foreign pretax income
and income tax expense.
The SEC is seeking
comment on these
disclosure differences
to help it decide
whether to refer them
to the FASB for potential
incorporation into U.S.
GAAP. | |
Outdated
requirements | Amend requirements
that have become
obsolete as a result of
the passage of time or
changes in the regulatory,
business, or technological
environment. |
| Market price disclosure:
The proposal would
substitute disclosure
of historical market
price information with
disclosure of the issuer’s
ticker symbol, which
investors can use to
obtain information on
stock price from various
Web sites. |
Superseded
requirements | Amend requirements
that are inconsistent with
new accounting, auditing,
disclosure requirements,
and more recently
updated Commission
disclosure requirements. |
| Extraordinary items:
References to
extraordinary items
would be eliminated from
the SEC’s rules and forms
since the FASB eliminated
extraordinary items from
U.S. GAAP in January
2015. |
Footnotes
1
SEC Proposed Rule Release No. 33-10110, Disclosure Update and Simplification. The proposal is also in response to a mandate under
the Fixing America’s Surface Transportation Act.
4
The SEC’s disclosure rules are primarily contained in Regulation S-X, which addresses financial statement disclosure requirements,
and Regulation S-K, which is the central respository for nonfinancial statement disclosures (e.g., risk factors and MD&A) for public
companies.
5
Regulation S-K, Item 103, “Legal Proceedings."
6
See Item 101(c)(1)(i) of Regulation S-K.
7
Regulation S-X, Rule 4-08(f), “Significant Changes in Bonds, Mortgages and Similar Debt.”
8
Regulation S-K, Item 101(b), “Financial Information About Segments.”
9
Regulation S-K, Item 303(b), “Interim Periods.”
10
For example, Regulation S-K, Item 201(c)(1), “Dividends,” and Regulation S-X, Rules 4-08(d)(2), “Preferred Shares,” and 4-08(e),
“Restrictions Which Limit the Payment of Dividends by the Registrant.”
11
If adopted, the proposal would enable FPIs in an initial public offering to use, in Form F-1, audited financial statements that are older
than 12 months (but not more than 15 months old) without obtaining a waiver from the SEC.