City Bar Proposes One-Sentence Rule for SEC Initiative to Enhance Disclosure

In a letter to the director of the SEC’s Division of Corporation Finance,  the New York City Bar Association applauds the Commission’s initiative to improve the quality and usefulness of public company disclosure, and proposes, separate and apart from existing disclosure requirements, “a rule to cut through the rules.” Prepared by the City Bar’s Committee on Financial Reporting, the letter was prompted by an initiative announced by the SEC to address the quality of business disclosure and the related problem of “disclosure overload.”  Following speeches by SEC Chair Mary Jo White and SEC Corporation Finance Director Keith Higgins, the Committee’s letter states, “We believe both were excellent contributions to the objective of disclosure enhancement, and we write in response to help with the effort to make public company disclosure more effective.”  The letter also states, “We share in particular the concern expressed by Commission Chair White regarding ‘ever-increasing amounts of disclosure’ that can ‘make it difficult for an investor to wade through the volume of information she receives to ferret out the information that is most relevant.’” The core problem, explains the letter, is that, while prescriptive rules certainly play an important role in disclosure, it can be difficult to mandate effective communication through rulemaking. “The natural managerial reaction to rulemaking, rather, is an effort to comply, which can result in an understandable but potentially counterproductive ‘compliance mindset’ that places technical conformity to the rules over effectiveness in communication.” Financial Reporting Committee Chair Michael Young, who signed the letter, said the Committee’s objective is to encourage companies to write with the plain English understandability of Warren Buffett.  “The challenge is how to accomplish that through a rule,” he said. The Committee’s letter proposes “a rule, separate and apart from existing disclosure requirements such as Item 303 (Management’s Discussion and Analysis), that encourages companies at the outset of their annual reports on Form 10-K or 20-F to effectively communicate their own plain English overview of what’s going on – much as a CEO might report to his or her board of directors.” The proposed rule would state, in its entirety: Provide an overview describing what happened at the company over the past year and your expectations and concerns about the year to come. As the letter notes, such an approach would leave to the judgment of management those aspects of business activity worth reporting. However, states the Committee, “our experience suggests that some of the most effective communication of business information has been achieved where management judgment has been permitted to play a significant role.” The Committee ultimately concludes that, in regard to business disclosure, “the most important information is best volunteered, up front, by management in a way that is both understandable and provides context. The challenge is to formulate a rule that seeks to accomplish that without inadvertently sending disclosure in the opposite direction.” The letter can be read here: