The SEC and market participants have long considered scaled disclosure for smaller public companies. Within that discussion, the concept of scaled disclosure has often been equated with less disclosure. According to members of the SEC’s Advisory Committee on Small and Emerging Companies, the emphasis on the quantity of disclosure may be misplaced. The proper focus, according to the committee, should be on the quality of disclosure that efficiently provides investors in smaller reporting companies with useful, material information.
The committee met at SEC headquarters Oct. 5, during which SEC Commissioner Michael S. Piwowar supported the concept of easing the regulatory burden on smaller companies, but noting that any such revisions should be carefully considered to avoid unintended consequences. He referred to 19th-century French economist Frédéric Bastiat, who wrote of consequences seen and unseen:
“A law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.”
Commissioner Kara Stein suggested that disclosures should be reformatted rather than scaled. Disclosure should be “fulsome and accurate” and should be structured to allow small companies to efficiently get their stories out to the market.
The committee discussion centered on revisions to Regulation S-K. According to Sara Hanks, committee co-chair and co-founder and CEO of CrowdCheck, Regulation S-K is the “bedrock” of the SEC’s disclosure regime. She stated that “we need to update Regulation S-K and scale disclosure appropriately for smaller reporting companies. That’s only half the battle, though, because lawyers need to interpret any regulatory changes consistently with small companies’ needs. If disclosure requirements are scaled down, lawyers have to let that happen.”
Gregory C. Yadley, a committee member and partner in the Tampa office of Shumaker, Loop & Kendrick LLP, described how materiality must be the starting point for disclosure matters. Smaller companies can benefit from principles-based reporting, he noted, rather than prescriptive disclosure rules. For example, he cited the required disclosures about various board committees. These disclosures by smaller companies are often not useful because these companies have small boards, and the same directors sit on most of the committees.
Patrick A. Reardon, a committee member and owner of The Reardon Firm in Fort Worth, Texas, urged companies to do more than merely mark up last year’s report. To get to what is important, Reardon advised lawyers to ask the CEO and CFO “what keeps you up at night?”
Committee member Annemarie Tierney, Vice President and Head of Strategy and New Markets at NASDAQ Private Market, stated that in an age of electronic disclosures, market participants will not read more than a summary.
Members of the committee also expressed their support and reaffirmed the recommendations the group made to the Commission in September 2015. Last year, the advisory committee urged the SEC to revise the definition of “smaller reporting company” to include companies with a public float of up to $250 million. That change would afford a broader range of smaller public companies to take advantage of exemptions from the pay ratio rule, the auditor attestation requirement and the Compensation Discussion & Analysis requirement. In June 2016, the SEC proposed rule changes under which registrants with less than $250 million in public float would qualify as smaller reporting companies, as would registrants with zero public float if their revenues were below $100 million in the previous year. The comment period for those proposals closed in August 2016.
The SEC should also revise its rules to provide smaller reporting companies with the same disclosure accommodations that are available to emerging growth companies, according to the committee. These rule changes would provide smaller reporting companies with exemptions from the requirement to conduct shareholder advisory votes on executive compensation and pay versus performance disclosure. Smaller reporting companies would also be exempt from the rules requiring mandatory audit firm rotation.
The committee also suggested a revision to the SEC’s definition of an “accelerated filer.” The definition should include companies with a public float of $250 million or more, but less than $700 million. Under this definition, the requirement to provide an auditor attestation report under Sarbanes-Oxley Act §404(b) would no longer apply to companies with public float between $75 million and $250 million.
Finally, the committee asserted that smaller reporting companies should be exempt from XBRL tagging and from the requirement to file immaterial attachments to material contracts.