President Trump’s administration hasn’t taken up many of the causes championed by the previous occupant of the White House. In fact, the current commander-in-chief has made a point of undoing any number of Obama-era initiatives.
That makes the ongoing push by the Securities and Exchange Commission (SEC) for enhancing “disclosure effectiveness” – an initiative that dates back all the way to 2013 – a rarity in today’s political landscape. Of course, “disclosure effectiveness” is a broad term subject to interpretation, and SEC Chair Jay Clayton’s take on it may not line up precisely with what his predecessor Mary Jo White had in mind six years ago. Clayton has couched disclosure effectiveness as a matter of “facilitating capital formation,” a cornerstone of his tenure with the commission. One could loosely translate the quoted phrase as an effort to make it easier for companies to play in the U.S. investment markets.
In any case, we’re all about to get a better sense of what “disclosure effectiveness” means at today’s SEC. Compliance professionals should be aware of three recent rulemaking developments that reflect Clayton’s vision for improved disclosure requirements.
Amended Definitions of “Accelerated Filer” and “Large Accelerated Filer”
Last week, the SEC voted in favor of proposing changes to the definitions of accelerated filers and large accelerated filers to filter out companies that qualified as so-called smaller reporting companies (SRCs) with less than $100 million in revenues. Notably, these companies would no longer need an independent auditor to bless their disclosures with an attestation of their internal control over financial reporting (ICFR). The proposal follows a similar move in 2018 to expand the group of SRCs subject to scaled-down disclosure requirements.
In his comments on the latest proposal, Clayton portrayed the ICFR auditor attestations as offering little bang for lots of bucks when it comes to oversight of smaller companies; consequently, the requirement puts U.S. capital markets at an unnecessary competitive disadvantage. Trump-appointed SEC Commissioners Elad L. Roisman and Hester M. Peirce backed the proposal. Meanwhile, in casting the lone dissenting vote among the panel, Democrat Robert J. Jackson dismissed the claims regarding the costs of attestation as having “no apparent basis in evidence.”
Amendments to Financial Disclosures about Acquired and Disposed Businesses
The Commission is also proposing changes to the rules for disclosures required of publicly registered companies following acquisitions and dispositions of business. They include alterations to the tests that govern whether registered companies have to provide financial statements of acquired businesses and the pro forma information for those transactions.
The revisions have important implications for companies conducting initial public offerings (IPOs): Registration statements would not need to include pre-acquisition financial statements of businesses acquired by companies going public so long as the registrants have included the acquired businesses in their consolidated financial statements for at least one year.
FAST Act Modernization and Simplification of Rule S-K
In March, the SEC adopted amendments intended to simplify some of the disclosure requirements outlined in Regulation S-K. Additionally, the amendments were designed to “improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.” In a nod to the emerging popularity of the internet, the agency also laid out requirements for investment companies to submit some filings in HyperText Markup Language. (The more computer-savvy among us might refer to that as “HTML.”)
We’ve previously written about the peculiar circumstances around these rule changes and the dissent Jackson issued to them. We also created a checklist to help issuers keep track of their compliance with the FAST Act.
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