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SEC Seeks Disclosure Rule Changes for Public Firms

SEC Seeks Disclosure Rule Changes for Public Firms

Investors Could Gain More Access to Financial Filings

BY FRANKLIN T. LLOYD

Special to the Business Journal

In a recent press release, Securities and Exchange Commission Chairman Harvey Pitt announced the SEC would seek a series of new disclosure rules for public companies.

These proposals relate to the Exchange Act reporting obligations of public company as well as their officers, directors, and principal shareholders.

The proposals relating to company reporting are in regards to changes in deadlines, contents, and manner of dissemination of Exchange Act Reports. Deadlines for filing reports on forms 10-K, 10-Q, and 8-K would be dramatically shortened:

o 10-Ks are due annually, 90 days following the company’s fiscal year-end. The proposal would shorten this due date to 60 days.

o 10-Qs are due quarterly, 45 days following each of the company’s first three fiscal quarters. The proposal would shorten this due date to 30 days.

o 8-Ks are due as late as 15 days following the date of a triggering event. The proposal would set the deadline for proposed new triggering events at one or two days after occurrence of the event.


– Content Changes

The proposals included two important content changes. The first involves changing the content requirement of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD & A;). The proposal calls for a company to identify those accounting policies that are critical to the portrayal of the company’s financial condition and involve difficult, subjective or complex judgments.

They will have to be discussed in detail using clear language. The proposal notes the expanded MD & A; would give investors a more complete view of the judgments and assumptions involved in preparing the financial statements and therefore a better understanding of what effect a change in judgment or assumptions would have.

The second involves adding events that would trigger an 8-K filing obligation. Under current regulations, an 8-K filing obligation is triggered in relatively few circumstances.

The proposal would add 15 new triggering events , all events an interested investor would like to know about. These events include transactions between the company and its insiders that might never be made public, such as waivers of corporate ethics and conduct rules, or might not be made public until a much later date such as a material change in an accounting policy or estimate.

Also included would be such events as:

– Loss of the CEO, CFO, COO, or equivalent person;

– Loss of a major contract;

– Discovery that the auditor will not permit reliance on a previous audit or will not consent to use of a prior audit in a Securities Act filing; and

– Any material event involving employee benefit, retirement and stock ownership plans including commencement or termination of a lockout period.


– Dissemination Of Information

The practice of publishing Exchange Act Reports on company Internet Web sites varies widely. The proposal would require all public companies to publish their exchange reports on their Web sites at the same time the reports are filed with the SEC.

Officers, directors and principal shareholders are required to file reports when they purchase or sell the company’s shares. The most frequently used of these reports is Form 4.

A Form 4 is required to be filed by officers, directors, and principal shareholders on the 10th day of the month following the month in which a reportable transaction occurs. Currently these reports are filed in paper form.

The proposal would dramatically reduce the time following a transaction in which to file a Form 4. However, unlike Forms 10-K, 10-Q, and 8-K, where filing deadlines are set by SEC regulations, the filing deadline for the Form 4 is specified in the Exchange Act itself.

To change this deadline will require an amendment. However, while waiting for the proposed changes to become law, the proposal would require companies to disclose on a current basis significant transactions in its securities by its executive officers and directors as part of the company’s reporting obligations.

It would also require reporting on a current basis any transaction between the company and any executive officer or director involving the company’s securities. The proposal indicates that the SEC is considering ways to require electronic reporting of purchases and sales by officers, directors, and principal shareholders.

Because of the administrative burden of setting up separate reporting numbers and passwords for the tens of thousands of officers, directors, and principal shareholders involved, the proposal is to place the burden of these filings on the companies involved.

The proposals contemplate that they would be implemented through legislative change (in the case of Forms 4) and SEC rulemaking. The SEC has promised to begin its formal rulemaking proposal as soon as possible but it has not yet done so.


– Proposed Changes Could Be Dramatic

Once the proposed rules are published and the rulemaking process begins, it could take months or years to complete. On the other hand, there is no doubt that rules carrying out the spirit of these proposals , more meaningful disclosure made in a more timely way , will be adopted.

If adopted as proposed, the changes would be dramatic. The new content of reports will provide investors with more and better tools to analyze the quality of the company’s financial information.

The new filing deadlines will provide important information at a time very close to the reported event. Public companies will be filing substantially more reports with shorter deadlines and broader dissemination.

This should produce greater confidence in public companies. It will significantly increase the cost and burden of Exchange Act compliance.

Some companies will want to adopt the proposals’ approach to new MD & A; content right away both because of the internal discipline it creates and because of the credibility it will create in the investment community.

Audit committee members concerned with best practices should view the 15 proposed additions to 8-K triggering events as a checklist of items required to be reported to the Audit committee on the same short notice contemplated in the proposals.

Lloyd is a former public company audit committee chair currently with the Exchange Act Reporting and Compliance Group of Higgs, Fletcher & Mack LLP, in San Diego.

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