In a recent speech, Commissioner Gallagher provided another perspective on the need for the SEC to focus on disclosure reform. Gallagher acknowledges the importance of tackling disclosure reform, even amidst the challenges faced by the SEC to focus on Dodd-Frank Act rulemaking mandates. Given the press of other business, Gallagher outlined a few specific areas where the SEC might make targeted changes. For example, he highlighted “layering” disclosures. This is consistent with the way in which investors seem to prefer to receive information, as was indicated in financial literacy study that was mandated by the Dodd-Frank Act. Gallagher also suggests streamlining 8-K disclosures. He notes that, “The gateway question, in looking at streamlining or curtailing the proliferation of 8-K filings, should be whether investors really need all of this welter of immediately updated information in order to know what is material about a company’s current condition. So, while acknowledging that the specification of information reportable on Form 8-K implicitly limits the types of information that must be disclosed immediately, the question is whether all such categories are of equal importance.” He also suggests an approach to reviewing and reducing redundancy in filings. Finally, he suggests streamlining proxy statements. Here is the full text of the speech: http://www.sec.gov/News/Speech/Detail/Speech/1370540462287. It will be interesting to see whether the SEC’s Study on Regulation S-K (mandated by the JOBS Act) spurs additional work on disclosure reform.
The SEC has made available links to the webcasts from Friday’s meeting of the Advisory Committee on Smaller and Emerging Companies. You may access the morning session at http://www.sec.gov/news/otherwebcasts/2013/acsec020113.asx and the afternoon session at http://www.sec.gov/news/otherwebcasts/2013/acsec020113-2.asx. Chairman Walter began the meeting with a few opening remarks, which may be accessed here:
http://www.sec.gov/news/speech/2013/spch020113ebw.htm. Chairman Walter invited the public to provide comments on the issues raised by the Advisory Committee, and, especially welcomed empirical studies and similar information on the matters being considered by the Committee. Lona Nallengara briefly discussed the status of the rulemaking related to the JOBS Act. Mr. Nallengara noted that the Staff is putting together recommendations relating to the Rule 506 rulemaking for consideration by the Commissioners. Mr. Nallengara noted the Committee had recommended that SEC resources not be directed to the Reg A+ rulemaking initiative, which is interesting given that the standalone legislation related to amending existing Regulation A, which preceded the JOBS Act received overwhelming bipartisan support. A participant asked that Mr. Nallengara comment on the drafting error in the JOBS Act that omitted mention of savings and loans and thrifts from the holder-of-record threshold. Mr. Nallengara noted that the SEC Staff is considering whether savings and loans and thrifts should be included in the relief on the holder-of-record threshold and this is being considered as part of the SEC’s rulemaking.
The Committee then proceeded to discuss its recommendations.
Tick Sizes: The Committee first considered its recommendation related to tick sizes. The Committee noted that a consensus has formed that incentives should be provided to market participants in order to encourage them to make active markets in the securities of smaller and mid-sized companies is important. The Committee suggests that the SEC adopt rules that implement a pilot study or pilot period (of sufficient duration) that will permit the adoption of increased tick sizes. This should be formulated such that companies will be permitted to choose their own tick sizes within specified ranges approved by the SEC. The SEC and others will then be able to assess the impact of increased tick sizes on liquidity in the securities of smaller and mid-cap companies. The recommendation was adopted.
New Securities Exchange: The Committee considered a recommendation that would encourage the establishment of a separate securities exchange that would be designed specifically for small and emerging companies that are newly public. A listing on the exchange would be seen as a transitional step for the listed companies, which might then move on to another exchange. The SEC should facilitate and encourage the creation of this market where investor participation would be limited to investors that are sophisticated or accredited and the exchange should have regulations designed to protect investors, but that would be flexible enough to encourage smaller and emerging companies to pursue public offerings. SEC representatives noted that there are no regulatory impediments that would prevent an exchange to propose a market for smaller and emerging companies, and that there may be business reasons that would limit the development of such a market. Disclosure requirements for these companies would be scaled, with accommodations made in light of the fact that the only investors that will have an opportunity to trade in these securities are sophisticated or accredited investors. There was significant discussion regarding this recommendation, with some commenters suggesting that the exchange be established for companies that are still private or non-SEC reporting companies (similar to the function served by SecondMarket) and other commentators suggesting that the exchange be established for newly public smaller companies that are subject to scaled disclosure requirements.
Disclosures for Smaller Companies: The Committee considered a recommendation that the definition of “smaller reporting company” be modified and the threshold raised from $75 million in public float to $250 million in public float, and that certain disclosure and governance requirements be modified or scaled for smaller reporting companies.