- Whether there is information that we require companies to include in their filings that those investors routinely get elsewhere. Is there information that they routinely ignore? What information do they think is missing? And in the age of smartphones and tablets, how can information be easier to access and use? And do technological advances lend themselves to a 'one-size-fits-all' approach, or should companies have flexibility to determine how they can convey information more effectively?
In addition, the guidance specifically stated that "our disclosure requirements might benefit from a broader principles-based approach, similar to our current rules for MD&A." Efforts would be made to improve navigability, including the use of structured data, hyperlinks, or topical indexes.
The approach in the speech promises to seek effective disclosure. With that as a goal, it seems as if the staff will need to seriously consider tagging all of the SEC forms under review. Doing so will allow the information to be easily accessible through the use of software and other tools. The SEC's Investor Advisory Committee has widely supported tagging but specifically recommended the tagging of some items in the Form 8-K. In addition, a tagging taxonomy has already been developed for the MD&A.
The decision to focus on periodic reports mostly eliminates one of the arguments for disclosure reduction. While cost to the issuer is always available as a basis for reducing disclosure, readability and access by ordinary investors is not. For the most part, periodic reports are technical filings not designed, as the proxy statement should be, for readability. The documents are likely accessed mostly by market professionals.
As Professor Coffee recently testified: "I do not believe it is realistic to expect Form 10-Ks to become short and concise. Indeed, securities analysts want them that way because they see them as a treasure trove of valuable data. Form 10-Ks are not aimed at the retail investor, but at the professional: the securities analyst and other intermediaries." Shareholders may want a shorter annual report (as in a Rule 14a-3 annual report), but there is no evidence that they are seeking a shorter Form 10-K.
As for principles based disclosure "similar" to MD&A, the MD&A and its history does not provide a propitious role model, the staff will have to seriously weigh whether it will be effective in practice. MD&A has not been a great success with respect to meaningful disclosure. As the staff of the Commission has noted: MD&A produces "too much meaningless 'boilderplate' . . . that provides . . . no meaningful information."
In the late 1980s and early 1990s, the Commission staff devoted an enormous amount of time and resources to improving MD&A. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Exchange Act Release No. 26831 (May 18, 1989); see also, IN THE MATTER OF CATERPILLAR INC., Exchange Act Release No. 30532 (admin proc March 31, 1992) (first SEC case brought for violation of MD&A without also including claim under antifraud provisions). As the boilerplate quote indicates, however, the efforts didn't work and were eventually abandoned.
If the staff seeks to mimic the MD&A approach, it will have to explain how the approach will result in higher quality of disclosure than MD&A. As the efforts back in the 1980s/1990s show, the staff has limited time and resources to police principles based disclosure. Thus, whatever promise the approach has in theory, the practice could easily be a disclosure system more reliant on boilerplate. Boilerplate will accomplish the goal of reducing issuer expense but at the cost of a reduction in disclosure effectiveness.