The SEC is advancing efforts to reform financial disclosure, but real reform is unlikely

Earlier this month the Securities and Exchange Commission took the next step in its year’s-long campaign to reform the vast dump of information we collectively call financial disclosure. It issued a concept release seeking public comment on hundreds of questions about improving disclosures required under regulation S-K, which covers the majority of financial reporting including annual and quarterly reports.

The SEC has embarked on an ambitious plan to make company filings more useful to investors and to try to eliminate some of the redundancy and legal language that makes such reports nearly impossible to trudge through for all but the most motivated professional investors.

The SEC said in a release that it is interested in receiving input on whether the disclosure requirements continue to elicit the information that investors need for investment and voting decisions (they don’t) and how registrants can most effectively present the information (just about anything would be better than what they do now).  The Commission also wants to hear views on the costs and benefits of the disclosure requirements for companies and investors. (Too much cost for too little benefit.)

Of course, it’s easy to be flippant about the U.S. financial reporting process. Financial disclosure has been so muddied by decades of slap-dash rules and requirements as regulators chase the latest crises and financial mischief with new reporting obligations. For so many years they have added new required disclosures and rules without giving much thought to how they affect the existing body of disclosure requirements and often without too much consideration of what companies need to do to provide it.

Legal Encryption

The blame for the current disclosure mess—and nearly everyone agrees it’s a mess—doesn’t sit entirely with the SEC. Issuers have often side-stepped new requirements with legal-speak so beautifully crafted that it satisfies the letter of the law without saying much of anything and does it with pages of text where a single, clear sentence would do. It’s nearly a form of cryptography that can only be decrypted by other lawyers, which hedge funds are only too happy to employ. Past SEC commissioners have tried to push plain English reporting, but short of enforcing the use of Strunk and White’s Elements of Style, it’s a hopeless pursuit.

It’s true, too, that the SEC has a thankless task in reforming financial disclosure. Part of the difficulty lies in the many different constituencies financial reporting serves. Small investors, activists (and by activists I mean the ripped jeans, pierced kind, not the wealthy raider types), journalists, and other more casual readers of financial statements may want simplification, but professional investors, analyst, hedge funds, and others want more, not less, disclosure. I also suspect that they enjoy the fact that they can crack the code and decipher results that appear to be gibberish to most others. In some ways it justifies their big salaries.

Companies may resist simplification too, if it means they have to actually plainly state what their risks are, what their leaders earn, and what events will really impact results. The SEC has been adamant that disclosure reform won’t necessarily make life easier for corporate reporting, nor is that its end goal.

“Timely, relevant and material information is critical to investors and companies,” said SEC Chair Mary Jo White.  “The concept release establishes a thoughtful framework for better understanding investors’ and companies’ experiences with the disclosure requirements and whether investors are receiving the information they need to make informed investment decisions.”

Clock is Ticking

The SEC is also seeking comment on various formats used to present information, such as tables and structured data, as well as different tools used to deliver disclosure, including cross-referencing, incorporation by reference, hyperlinks, and company websites. Rethinking the disclosure format could be promising, but is likely to get bogged down in the same morass as the what-to-disclose debate. Perhaps more could be done to force companies to include summaries and at-a-glance representations of information.

The fact that the SEC is taking up this project is a positive, but it’s hard to be too optimistic that much will come out of it. Similar initiatives have come and gone and the patchwork of requirements remains. One of the biggest hurdles to disclosure reform is how arduous the process is and how long it takes. And there lies, perhaps the biggest problem: Even if White is successful at advancing the disclosure reform ball down the field, the clock is ticking. White is already three years into a five-year term. The presidential election will bring a new regime with its own goals and political supporters to please. Such a change usually means other objectives take priority, or the project gets restarted…again.

If it’s any indication of just how difficult and complex the job of reforming the financial disclosure system will be, this month’s concept release—just a small part of the reform process—itself runs 341 pages, and contains enough vague and obfuscating language to make any lawyer smile, including this gem: “The staff is also working on recommendations for our consideration to propose specific revisions to update or simplify certain of our business and financial disclosure requirements, as required by the recently enacted Fixing America’s Surface Transportation Act of 2015 (“FAST Act”).