Investor Thoughts on the SEC’s Proposed Disclosure Reform

February 13, 2014

By Farah Merchant, Business Wire

SEC Chair Mary Jo White recently issued a staff report to Congress on disclosure reform initiatives.  The report, mandated by Congress in the 2012 Jumpstart Our Business Startups (JOBS) Act, offers an overview of the SEC’s Regulation S-K.

Regulation S-K pertains to disclosure, and first applies to companies upon IPO that register with the SEC using form S-1, and refers to ongoing reporting requirements in Forms 8-K and 10-K.

SEC reportWhite’s primary concern is the risk of information overload to investors, and she defined information overload as, “a phenomenon in which ever-increasing amounts of disclosure make it difficult for an investor to wade through the volume of information they receive to ferret out the information that is most relevant.”

She believes the guidance needs to be updated as there is repetition in disclosure, where certain items appear in more than one section, i.e., information on legal proceedings that appears in its own section but also in the notes to financial statements, risk factors and MD&A.

White addressed the need for input from market participants for the following proposed recommendations:

  • Recommending that companies file a “core document” or “company profile” with information that changes infrequently (needs to be reworded)
  • Amending the filing process by streamlining and simplifying disclosure requirements to reduce administrative costs
  • Researching ways to enhance the presentation and communication of information; and to use technology to address these issues

Click here for a copy of the full SEC report.

Is less disclosure more helpful or harmful to investors?

According to a recent Fortune article, the early opinion on the street is that although the disclosure requirements of the SEC may need an updated and possible streamlining, the information currently available is useful and helpful.

Although it may be true that not all investors read a filing in full, there are many that do, as the full filing provides insight on investment and voting decisions. By having more information available, investors feel that they can be more diligent in assessing risks. If nothing else, the recent financial crisis has taught investors a valuable lesson and that is to be more informed, more educated and to not discount risks.

So already we have a difference of opinion. On one hand you have the SEC looking to ‘simplify’ their disclosure process, with the possibility of reducing the amount of information necessary for companies to meet disclosure requirements. On the other hand, you have the street, which at first blush is more than happy with the amount of content and would be happy to receive even more granular details.

So where do you stand on SEC disclosures: More, less, or just right?


TRUNCATED TRANSPARENCY: The JOB Act’s Compressed IPO Cycle and its Hidden Implications for Market Fairness

April 27, 2012
by Neil Hershberg, Senior Vice President, Global Media/Business Wire
Neil Hershberg

Neil Hershberg, SVP - Global Media

Welcome to the new era of clandestine compliance.

The newly passed JOBS Act (Jumpstart Our Business Startups Act) has come under withering attack by an influential chorus of critics. They are sounding the alarm that the Act dangerously dials back the disclosure obligations of “emerging companies” seeking to go public.

To be clear, we are not talking about mom-and-pop operations here. In Washington’s grandiose way of thinking, “startups” are defined as having revenues of up to $1 billion annually.  In other words, the majority of companies opting to go public will now get up to a five-year exemption from many of today’s more stringent disclosure requirements.

The controversial legislation has drawn fire from leading journalists, including Andrew Ross Sorkin of The New York Times; securities regulators, including SEC Chairman Mary Schapiro; and shareholder advocates, including Barbara Roper of The Consumer Federation of America. The consensus view is that the JOBS Act is a regressive measure that threatens to erode many longstanding investor safeguards. Clever acronyms aside, the JOBS Act is broadly portrayed as weakening the safety net for investors.

The JOBS Act does create new channels for pre-IPOs to communicate with the investment community. However, the Act effectively closes the blinds on the closely monitored IPO pipeline, precluding the ability of investors to delve deeply into the dealings of companies under consideration. Under the new ground rules, prospective IPOs are now protected by a cloak of sanctioned secrecy during the protracted filing period leading up to their public offering.

The result is that clarity has given way to opaqueness. IPOs are now able to engage in confidential discussions with the SEC about their plans to tap the capital markets, until 21 days before the IR Road Show cavalcade begins.

Critical corporate information that was previously made available to investors months in advance — including financials and insights into the company’s organizational structure — can now be legitimately withheld from public scrutiny until three weeks before the investor marketing process gets underway.

What this means in practice is that investors essentially have about a month or so to evaluate the financial viability of a company preening to go public; previously, interested investors had a minimum of several months to do their due diligence.

There also is a more subtle side effect to today’s cloistered IPO process, one that further distorts the dynamics of a fair and competitive marketplace.

The SEC approved a rule change last December that allows NASDAQ to offer “free” corporate IR services, e.g. press release distribution and IR Web hosting, to IPOs and companies that transfer their listings from the NYSE.

Coincidentally, all these corporate services are provided by NASDAQ’s wholly owned subsidiaries, thwarting competition. The ability of NASDAQ to bundle IR services with its listing fees effectively elbows other service providers — many with superior, more advanced product offerings — out of the equation.

The agency’s approval came despite what we believe was a preponderance of evidence that the practice was anti-competitive. Ironically, SEC Chairman Schapiro was recently called to testify before a Congressional committee looking into the agency’s lack of economic analysis in its rule-making process. Clearly, the SEC should have done a lot more home work before rendering a decision in favor of NASDAQ’s rule change.

For all its political promise and good intentions, the JOBS Act has made a bad situation worse. Any pretense of market fairness during the IPO birthing process has now lost all credibility.

Today’s closed environment allowing IPOs to silently snake their way through the filing process has reinforced NASDAQ’s unfair competitive advantage, eliminating any premise of meaningful competition. Not only does NASDAQ have the inside track, but the track itself is now largely hidden from public view.

In perhaps the cruelest irony, the JOBS Act may result in the ultimate unintended consequence: potentially destroying jobs in a robust industry that has long thrived based on a model of fair and open competition.


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