[Federal Register Volume 81, Number 78 (Friday, April 22, 2016)]
[Proposed Rules]
[Pages 23915-24008]
[FR Doc No: 2016-09056]

Vol. 81

Friday,

No. 78

April 22, 2016

Part III

Securities and Exchange Commission

-----------------------------------------------------------------------

17 CFR Parts 210, 229, 230, et al.

 Business and Financial Disclosure Required by Regulation S-K; Concept
Release; Proposed Rule

Federal Register / Vol. 81 , No. 78 / Friday, April 22, 2016 /
Proposed Rules

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 232, 239, 240 and 249

[Release No. 33-10064; 34-77599; File No. S7-06-16]
RIN 3235-AL78

Business and Financial Disclosure Required by Regulation S-K

AGENCY: Securities and Exchange Commission.

ACTION: Concept release.

-----------------------------------------------------------------------

SUMMARY: The Commission is publishing this concept release to seek
public comment on modernizing certain business and financial disclosure
requirements in Regulation S-K. These disclosure requirements serve as
the foundation for the business and financial disclosure in
registrants' periodic reports. This concept release is part of an
initiative by the Division of Corporation Finance to review the
disclosure requirements applicable to registrants to consider ways to
improve the requirements for the benefit of investors and registrants.

DATES: Comments should be received on or before July 21, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/concept.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-06-16 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-16. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's Web site (http://www.sec.gov/rules/concept.shtml). Comments also are available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
publicly available.

FOR FURTHER INFORMATION CONTACT: Angie Kim, Special Counsel in the
Office of Rulemaking, at<PHONE_NUMBER>, in the Division of Corporation
Finance; 100 F Street NE., Washington, DC 20549.

Table of Contents

I. Introduction
II. Relevant History and Background
    A. History of Regulation S-K
    B. Broad Economic Considerations
    C. Prior Regulation S-K Modernization Initiatives and Studies
III. Disclosure Framework
    A. Basis for Our Disclosure Requirements
    1. Statutory Mandates
    2. Commission Responses to Market Developments
    B. Nature of Our Disclosure Requirements
    1. Principles-Based and Prescriptive Disclosure Requirements
    2. Audience for Disclosure
    3. Compliance and Competitive Costs
IV. Information for Investment and Voting Decisions
    A. Core Company Business Information
    1. General Development of Business (Item 101(a)(1))
    2. Narrative Description of Business (Item 101(c))
    3. Technology and Intellectual Property Rights (Item
101(c)(1)(iv))
    4. Government Contracts and Regulation, Including Environmental
Laws (Items 101(c)(1)(ix) and (c)(1)(xii))
    5. Number of Employees (Item 101(c)(1)(xiii))
    6. Description of Property (Item 102)
    B. Company Performance, Financial Information and Future
Prospects
    1. Selected Financial Data (Item 301)
    2. Supplementary Financial Information (Item 302)
    3. Content and Focus of MD&A (Item 303--Generally)
    4. Results of Operations (Item 303(a)(3))
    5. Liquidity and Capital Resources (Item 303(a)(1) and (a)(2))
    6. Off-Balance Sheet Arrangements (Item 303(a)(4))
    7. Contractual Obligations (Item 303(a)(5))
    8. Critical Accounting Estimates
    C. Risk and Risk Management
    1. Risk Factors (Item 503(c))
    2. Quantitative and Qualitative Disclosures About Market Risk
(Item 305)
    3. Disclosure of Approach to Risk Management and Risk Management
Process
    4. Consolidating Risk-Related Disclosure
    D. Securities of the Registrant
    1. Related Stockholder Matters--Number of Equity Holders (Item
201(b))
    2. Description of Capital Stock (Item 202)
    3. Recent Sales of Unregistered Securities (Items 701(a)-(e))
    4. Use of Proceeds From Registered Securities (Item 701(f))
    5. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers (Item 703)
    E. Industry Guides
    1. Comments Received
    2. Discussion
    3. Request for Comment
    F. Disclosure of Information Relating to Public Policy and
Sustainability Matters
    1. Comments Received
    2. Discussion
    3. Request for Comment
    G. Exhibits
    1. Request for Comment
    2. Schedules and Attachments to Exhibits
    3. Amendments to Exhibits
    4. Changes to Exhibits (Instruction 1 to Item 601)
    5. Material Contracts (Item 601(b)(10))
    6. Preferability Letter (Item 601(b)(18))
    7. Subsidiaries and Legal Entity Identifiers
    H. Scaled Requirements
    1. Categories of Registrants Eligible for Scaled Disclosure
    2. Scaled Disclosure Requirements for Eligible Registrants
    3. Frequency of Interim Reporting
V. Presentation and Delivery of Important Information
    A. Cross-Referencing
    1. Comments Received
    2. Discussion
    B. Incorporation by Reference
    1. Comments Received
    2. Discussion
    3. Request for Comment
    C. Hyperlinks
    1. Comments Received
    2. Discussion
    3. Request for Comment
    D. Company Web Sites
    1. Comments Received
    2. Discussion
    3. Request for Comment
    E. Specific Formatting Requirements
    1. Comments Received
    2. Discussion
    3. Request for Comment
    F. Layered Disclosure
    1. Comments Received
    2. Discussion
    3. Request for Comment
    G. Structured Disclosures
    1. Comments Received
    2. Discussion
    3. Request for Comment
VI. Conclusion

I. Introduction

    Regulation S-K was adopted to foster uniform and integrated
disclosure for registration statements under the Securities Act of 1933
(``Securities Act''), registration statements under the Securities
Exchange Act of 1934 (``Exchange Act''), and other Exchange Act
filings, including periodic and current reports.\1\ Over thirty years
ago, the Commission expanded and reorganized Regulation S-K to be the

central repository for its non-financial statement disclosure
requirements.\2\ When adopting the integrated disclosure system, the
Commission's goals were to reduce the costs to registrants and
eliminate duplicative disclosures while continuing to provide material
information.\3\ In this concept release, we revisit the business and
financial disclosure requirements in Regulation S-K. We seek to assess
whether they continue to provide the information that investors need to
make informed investment and voting decisions and whether any of our
rules have become outdated or unnecessary.
---------------------------------------------------------------------------

    \1\ See Item 10(a) of Regulation S-K [17 CFR 229.10].
    \2\ See Adoption of Integrated Disclosure System, Release No.
33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (``1982
Integrated Disclosure Adopting Release'').
    \3\ See id.
---------------------------------------------------------------------------

    We focus this release on business and financial disclosures that
registrants provide in their periodic reports, which are a subset of
the disclosure requirements in Regulation S-K.\4\ We focus on these
requirements because many of them have changed little since they were
first adopted. We are not at this time revisiting other disclosure
requirements in Regulation S-K, such as executive compensation and
governance, or the required disclosures for foreign private issuers,
business development companies, or other categories of registrants.
Although the specific scope of this concept release is as indicated, we
welcome and encourage comments on any other disclosure topics not
specifically addressed in this concept release.
---------------------------------------------------------------------------

    \4\ The scope of this release does not include certain
disclosure requirements for information other than business and
financial disclosures, such as Subpart 400, which requires
disclosure about management and certain security holders as well as
corporate governance matters. We also have not included offering-
specific disclosure requirements under Subpart 500, which generally
apply to registration statements and prospectuses but not periodic
reports.
---------------------------------------------------------------------------

    This release begins with a discussion of the regulatory history of
the integrated disclosure system and Regulation S-K as well as an
overview of prior initiatives to review and modernize our disclosure
requirements. We then present the framework for our current disclosure
regime and explore potential alternative approaches. We proceed to
review the business and financial disclosure requirements that apply to
periodic reports. We first consider what financial and business
information should be required and whether any of these requirements
are appropriate to scale for smaller registrants. We then explore how
registrants can most effectively present this information to improve
its usefulness to investors. In this release, we consider input we have
received from letters submitted in response to disclosure modernization
efforts \5\ as well as the staff's experience with particular
disclosure requirements, regulatory history and changes in the
regulatory and business landscape since the rule's adoption.
---------------------------------------------------------------------------

    \5\ See infra notes 9 to 10 and accompanying text.
---------------------------------------------------------------------------

    Through this release, we are reviewing and seeking public comment
on whether our business and financial disclosure requirements continue
to elicit important information for investors and how registrants can
most effectively present this information. We are specifically seeking
comment on:
     Whether, and if so, how specific disclosures are important
or useful to making investment and voting decisions and whether more,
less or different information might be needed;
     whether, and if so how, we could revise our current
requirements to enhance the information provided to investors while
considering whether the action will promote efficiency, competition,
and capital formation; \6\
---------------------------------------------------------------------------

    \6\ Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] requires
that, whenever the Commission is engaged in rulemaking under the
Exchange Act and is required to consider or determine whether an
action is necessary or appropriate in the public interest, the
Commission shall also consider, in addition to the protection of
investors, whether the action will promote efficiency, competition
and capital formation. Section 2(b) of the Securities Act [15 U.S.C.
77b(b)] sets forth this same requirement. See also Section 23(a)(2)
of the Exchange Act [15 U.S.C. 78w(a)(2)].
---------------------------------------------------------------------------

     whether, and if so how, we could revise our requirements
to enhance the protection of investors;
     whether our current requirements appropriately balance the
costs of disclosure with the benefits;
     whether, and if so how, we could lower the cost to
registrants of providing information to investors, including
considerations such as advancements in technology and communications;
     whether and if so, how we could increase the benefits to
investors and facilitate investor access to disclosure by modernizing
the methods used to present, aggregate and disseminate disclosure; and
     any challenges of our current disclosure requirements and
those that may result from possible regulatory responses explored in
this release or suggested by commenters.

While we set forth a number of general and specific questions, we
welcome comments from investors, registrants and other market
participants on any other concerns related to our disclosure
requirements. In addition to comments received on this release, we will
consider any input from investor focus group studies or surveys, the
Investor Advisory Committee and the Advisory Committee on Small and
Emerging Companies.

    This concept release is part of a comprehensive evaluation of the
Commission's disclosure requirements recommended in the staff's Report
on Review of Disclosure Requirements in Regulation S-K (``S-K Study''),
which was mandated by Section 108 of the Jumpstart Our Business
Startups Act (``JOBS Act'').\7\ Based on the S-K Study's recommendation
and at the request of Commission Chair Mary Jo White,\8\ Commission
staff initiated a comprehensive evaluation of the type of information
our rules require registrants to disclose, how this information is
presented, where and how this information is disclosed and how we can
leverage technology as part of these efforts (collectively,
``Disclosure Effectiveness Initiative''). The overall objective of the
Disclosure Effectiveness Initiative is to improve our disclosure regime
for both investors and registrants.
---------------------------------------------------------------------------

    \7\ Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). Section
108 of the JOBS Act required the Commission to conduct a review of
Regulation S-K to determine how such requirements can be updated to
modernize and simplify the registration process for emerging growth
companies (``EGCs''). For a further discussion of the S-K Study, see
Section II.C.
    \8\ See SEC Issues Staff Report on Public Company Disclosure
(Dec. 20, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540530982.
---------------------------------------------------------------------------

    In connection with the S-K Study \9\ and the subsequent launch of
the Disclosure Effectiveness Initiative,\10\ we received public
comments on various topics discussed in this release. Below and
elsewhere throughout this release, we discuss these comments as further
context for the topics under consideration. Comments received in
connection with the Disclosure Effectiveness Initiative that are
outside the scope of this release are not discussed here. These comment
letters are being considered as part of the staff's continued
evaluation of Regulation S-K

from which the staff expects to make further recommendations to the
Commission for consideration.
---------------------------------------------------------------------------

    \9\ In connection with the S-K Study, we received public
comments on regulatory initiatives to be undertaken in response to
the JOBS Act. See Comments on SEC Regulatory Initiatives Under the
JOBS Act: Title I--Review of Regulation S-K, available at http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml.
     Some of the comments received in connection with the S-K Study
were specific to EGCs.
    \10\ To facilitate public input on the Disclosure Effectiveness
Initiative, members of the public were invited to submit comments.
Public comments we have received to date on the topic of Disclosure
Effectiveness are available on our Web site. See Comments on
Disclosure Effectiveness, available at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
---------------------------------------------------------------------------

    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'').\11\ Those recommendations relate to specific proposals
to help address ``duplicative, overlapping, outdated or unnecessary''
disclosure and are not specifically addressed in this concept release,
which seeks to explore both general considerations and specific
questions that we believe would benefit from further evaluation and
input before proposing any changes to the related rules.\12\
---------------------------------------------------------------------------

    \11\ Public Law 114-94, Sec. 72002, 129 Stat. 1312 (2015).
    \12\ Id.
---------------------------------------------------------------------------

II. Relevant History and Background

A. History of Regulation S-K

Regulation S-K
    Enactment of the Securities Act and the Exchange Act resulted in
the creation of two separate disclosure regimes. These disclosure
regimes remained distinct for approximately thirty years and often
resulted in overlapping and duplicative disclosure requirements.
Regulation S-K reflects the Commission's efforts to harmonize
disclosure required under both the Securities Act and the Exchange Act
by creating a single repository for disclosure regulation that applies
to filings by registrants under both statutes.
    The current integrated disclosure system resulted from a series of
efforts triggered by a 1964 amendment to the Exchange Act,\13\ which
added Section 12(g) to the Exchange Act and extended the Exchange Act's
reporting requirements to companies meeting specified thresholds,
including those that were not exchange listed.\14\ In light of the
Exchange Act's broadened reporting requirements, Professor Milton Cohen
suggested in a seminal 1966 law review article greater coordination
between the Securities Act and Exchange Act.\15\ He recommended that
the continuous reporting obligations under the Exchange Act serve as
the foundation for corporate disclosure while relaxing or eliminating
overlapping Securities Act disclosure requirements.\16\
---------------------------------------------------------------------------

    \13\ See, e.g., Disclosure to Investors--A Reappraisal of
Federal Administrative Policies under the '33 and '34 Acts, Policy
Study, Mar. 27, 1969, available at http://www.sechistorical.org/museum/galleries/tbi/gogo_d.php (``Wheat Report'') (stating that one
of the reasons for a broad re-examination of disclosure policy was
the 1964 amendment to the Exchange Act). See also infra note 15.
    \14\ 15 U.S.C. 781(g). Congress enacted Section 12(g) of the
Exchange Act in 1964, which required an issuer to register a class
of securities under Section 12(g) if the securities were ``held of
record'' by 500 or more persons and the issuer had total assets
exceeding $1 million. Prior to the enactment of Section 12(g), the
Exchange Act reporting requirements were applicable only to listed
companies. The Commission used its authority under Section 12(h) to
raise the asset threshold for Section 12(g) registration from $1
million to $3 million in 1982, $5 million in 1986 and $10 million in
1996.
    As a result of amendments made by the JOBS Act and the FAST Act,
Section 12(g)(1) of the Exchange Act now requires an issuer that is
not a bank, bank holding company, or savings and loan holding
company to register a class of equity securities if the securities
are held of record by either (i) 2,000 persons, or (ii) 500 persons
who are not accredited investors and the issuer has total assets
exceeding $10 million. Banks, bank holding companies and savings and
loan holding companies with total assets exceeding $10 million must
register a class of equity securities if the securities are held of
record by 2,000 or more persons. Public Law 112-106, Sec. 501, 126
Stat. 306 (2012) and Public Law 114-94, Sec. 85001, 129 Stat. 1312
(2015).
    \15\ See Milton H. Cohen, ``Truth in Securities'' Revisited, 79
Harv. L. Rev. 1340, 1350 (1966) (``With the 1934 Act now extended to
thousands of additional companies by the 1964 Amendments, the need
of a reexamination with an eye to coordination of the 1934 Act with
the earlier one is all the greater'').
    \16\ See id. at 1341-42, stating ``[i]t is my thesis that the
combined disclosure requirement of these statutes would have been
quite different if the 1933 and 1934 Acts (the latter as extended in
1964) had been enacted in opposite order, or had been enacted as a
single, integrated statute--that is, if the starting point had been
a statutory scheme of continuous disclosures covering issuers of
actively traded securities and the question of special disclosures
in connection with public offerings had been faced in this setting.
Accordingly, it is my plea that there now be created a new
coordinated disclosure system having as its basis the continuous
disclosure system of the 1934 Act and treating ``1933 Act''
disclosure needs on this foundation.''
---------------------------------------------------------------------------

    Subsequent to the publication of this article, the Commission
initiated several studies that advanced efforts to integrate the
Securities Act and Exchange Act disclosure regimes. These efforts
included the Disclosure Policy Study led by Commissioner Francis Wheat
\17\ and the report issued by the Advisory Committee on Corporate
Disclosure led by former Commissioner A. A. Sommer, Jr. (``Sommer
Report'').\18\ In 1969, the Wheat Report concurred with Cohen's
proposal for a coordinated disclosure system. It recommended an
enhanced degree of coordination between the disclosures required by the
Securities Act and the Exchange Act and formulated specific proposals
for integrating disclosure between the two Acts.\19\ In 1977, the
Sommer Report suggested adopting a single, integrated disclosure system
and recommended developing one coordinated disclosure form.\20\
---------------------------------------------------------------------------

    \17\ See supra note 13.
    \18\ See Report of the Advisory Committee on Corporate
Disclosure to the Securities and Exchange Commission, Cmte. Print
95-29, House Cmte. On Interstate and Foreign Commerce, 95th Cong.,
1st. Sess (Nov. 3, 1977) available at http://opc-ad-ils/
InmagicGenie/DocumentFolder/
report%20of%20the%20advisory%20committee%20on%20corporate%20disclosur
e%20to%20the%20sec%2011011977.pdf.
    \19\ See generally Wheat Report.
    \20\ See Sommer Report at 420-432.
---------------------------------------------------------------------------

    Following the Sommer Report, the Commission adopted the first
version of Regulation S-K, which included only two disclosure
requirements--a description of business and a description of
properties.\21\ While additional disclosure requirements were added in
1978 and 1980,\22\ Regulation S-K was significantly expanded and
reorganized in 1982 as the repository for the uniform non-financial
statement disclosure requirements under both the Securities Act and
Exchange Act.\23\ With this expansion and reorganization, the
Commission moved much of the guidance in the prior Industry Guides into
Regulation S-K and amended the forms and schedules to reference
requirements in Regulation S-K.\24\
---------------------------------------------------------------------------

    \21\ See Adoption of Disclosure Regulation and Amendments of
Disclosure Forms and Rules, Release No. 33-5893 (Dec. 23, 1977) [42
FR 65554 (Dec. 30, 1977)] (``1977 Regulation S-K Adopting
Release'').
    \22\ See S-K Study at 10, footnote 27.
    \23\ See id. at 10, footnote 28.
    \24\ For a discussion of the Industry Guides, see infra notes
639 to 644 and accompanying text.
---------------------------------------------------------------------------

    Many of the disclosure requirements in Regulation S-K originated in
Schedule A of the Securities Act, which lists 27 items that must be
disclosed in a registration statement and prospectus.\25\ Section 7 of
the Securities Act provides that the registration statement shall
contain the information and be accompanied by the documents specified
in Schedule A, except the Commission may exercise its rulemaking
authority to prescribe additional information or may permit prescribed
information to be omitted as it deems necessary or appropriate in the
public interest or for the protection of

investors.\26\ Over the years, the Commission has exercised this
authority to adopt various registration forms and disclosure
requirements. While many of the disclosure requirements currently in
Regulation S-K originated in Schedule A, the Commission has amended
Regulation S-K numerous times since its adoption.\27\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 77aa. Schedule A requires companies to provide
information such as: General information about the company, its
business and capital structure; information about the directors,
principal officers, promoters and ten percent stockholders and
remuneration of officers and directors; information about the
offering; financial statements of the company and of any business to
be acquired through the proceeds of the issue; and copies of
agreements made with underwriters, opinions of counsel on legality
of the issue, material contracts, the company's organizational
documents and agreements or indentures affecting any securities
offered.
    \26\ 15 U.S.C. 77g.
    \27\ For a comprehensive discussion of prior revisions to
Regulation S-K, please see Sections II and III of the S-K Study at
8-92.
---------------------------------------------------------------------------

B. Broad Economic Considerations

    The purpose of corporate disclosure is to provide investors with
information they need to make informed investment and voting decisions.
Lowering information asymmetries between managers of companies and
investors may enhance capital formation and the allocative efficiency
of the capital markets. In particular, disclosure of information that
is important for investment and voting decisions may lead to more
accurate share prices, discourage fraud, heighten monitoring of the
managers of companies, and increase liquidity. Effective disclosure
requirements also should increase the integrity of securities markets,
build investor confidence, and support the provision of capital to the
market. In addition, such requirements can facilitate the coordination
of registrants around consistent disclosure standards, increasing the
efficiency with which investors can process the information.
    There are potential drawbacks associated with disclosure
requirements. Disclosure can be costly for registrants to produce and
disseminate, and disclosure of certain sensitive information can result
in competitive disadvantages. There is also a possibility that high
levels of immaterial disclosure can obscure important information or
reduce incentives for certain market participants to trade or create
markets for securities. The appropriate choice of disclosure
requirements therefore involves certain tradeoffs. These tradeoffs may
depend on the nature of the audience for disclosure and the
characteristics of registrants.
    Markets are composed of a broad spectrum of investors with
different information needs. Some investors may be highly sophisticated
and have access to substantial resources to process and interpret data,
while others may lack sophistication or have fewer resources to process
and interpret data. Investors also may differ in their reliance on
disclosure or on third-party analyses of disclosure. The breadth of the
audience for disclosure may inform choices about what information is
important to investment and voting decisions and should therefore be
disclosed. The diversity of the audience for disclosure, and how
different subsets of this audience access and digest information about
registrants, will also affect decisions about how best to format and
disseminate disclosure.
    The trade-off between the benefits and costs of disclosure
requirements may vary across different types of registrants. For
example, to the extent that our disclosure requirements impose fixed
costs, they may impose a disproportionate burden on smaller
registrants. At the same time, these registrants may have relatively
simple operations and thus be able to promote an understanding of their
business and financial condition with less disclosure than larger, more
complex registrants. Accordingly, it may be appropriate to provide
disclosure accommodations for certain types of registrants, while
remaining cognizant of the potential adverse impacts that reduced
disclosure may have on capital formation and the allocative efficiency
of the capital markets.
    The benefits associated with disclosing certain items of
information may be greater in some cases than in others, such as when
an item of disclosure reflects an important part of one registrant's
operations but an immaterial part of another's. In this context, it may
be important to consider various approaches to trigger disclosure where
it is more likely to be important, rather than in all cases. It may
also be useful to have disclosure requirements, or guidance in
fulfilling these requirements, that are specific to certain industries
or other subsets of registrants. We seek to understand if disclosure
requirements can be more appropriately tailored to registrants given
the likely variation across registrants in the benefits and the costs
of disclosing certain types of information. We discuss specific
economic considerations in more detail below.

C. Prior Regulation S-K Modernization Initiatives and Studies

    From time to time, the Commission has assessed its disclosure
requirements. Several of these studies focused on modernizing or
simplifying disclosure requirements. Other initiatives focused on
different aspects of the regulatory framework, such as the securities
offering process or the financial reporting system, but had the effect
of raising disclosure issues for further consideration or shaping
current disclosure requirements. The Disclosure Effectiveness
Initiative builds upon these prior studies and initiatives.
Task Force on Disclosure Simplification
    The Task Force on Disclosure Simplification (``Task Force''),
comprising staff from across the Commission, was formed in 1995 to
review regulations affecting capital formation with a view towards
``streamlining, simplifying, and modernizing the overall regulatory
scheme without compromising or diminishing important investor
protections.'' \28\ In its report to the Commission in 1996, the Task
Force recommended the Commission ``eliminate or modify many rules and
forms, and simplify several key aspects of securities offerings.'' \29\
Based on the Task Force's recommendations, the Commission rescinded
forty-five rules and six forms and adopted other minor or technical
rule changes to eliminate unnecessary requirements and to streamline
the disclosure process.\30\
---------------------------------------------------------------------------

    \28\ See Report of the Task Force on Disclosure Simplification,
available at www.sec.gov/news/studies/smpl.htm (Mar. 5, 1996)
(``Task Force Report''). To facilitate its review, the Task Force
met with issuers, investor groups, underwriters, accounting firms,
law firms and other active participants in the capital markets.
    \29\ See id. stating `` . . . recommendations [of the task
force] roughly fall into three categories: (1) Weeding out forms and
regulations that are duplicative of other requirements or have
outlived their usefulness; (2) Requiring more readable and
informative disclosure documents; and (3) Reducing the cost of
securities offerings and increasing access of smaller companies to
the securities markets.''
    \30\ See Phase One Recommendations of Task Force on Disclosure
Simplification, Release No. 33-7300 (May 31, 1996) [61 FR 30397
(June 14, 1996)] (``Phase One Recommendations of Task Force on
Disclosure Simplification Release''). For example, changes to
Regulation S-K included eliminating four infrequently used (or
otherwise already available) items from the list of required
exhibits in Item 601(b) (opinion regarding discount on capital
shares, opinion regarding liquidation preference, material foreign
patents, and information from reports furnished to state insurance
regulatory authorities).
    See also Phase Two Recommendations of Task Force on Disclosure
Simplification, Release No. 33-7431 (July 18, 1997) [62 FR 43581
(Aug. 14, 1997)] (``Phase Two Recommendations of Task Force on
Disclosure Simplification Release'') (rescinding two forms and one
rule and amending a number of rules and forms). The Commission
further implemented certain of the recommendations in the Task Force
Report relating to accounting disclosure rules that were identified
as being largely duplicative of U.S. GAAP or other Commission rules.
---------------------------------------------------------------------------

    The Task Force also made the following recommendations on
Regulation S-K:
     Streamline Item 101's description of business disclosure
by eliminating duplication of quantitative information about business
segments and foreign operations provided in the financial statements;

     revise Item 102's description of property disclosure to
elicit ``more meaningful and material disclosure;'' and
     eliminate Item 103's instruction to replace the $100,000
standard with a general materiality standard for certain environmental
legal proceedings to ensure registrants will not be required to
disclose non-material information.\31\
---------------------------------------------------------------------------

    \31\ The Task Force also generally recommended adjusting certain
dollar thresholds in Regulation S-K and Regulation S-X for inflation
since the time of their adoption. The Task Force cited, among other
items, the $50,000 threshold in Item 509 of Regulation S-K (relating
to disclosure of payments to experts and counsel) [17 CFR 229.509]
and the $100,000 threshold in Rule 3-11 of Regulation S-X (relating
to the definition of an inactive registrant) [17 CFR 210.3-11]. See
Task Force Report.

While the Commission made a number of changes in response to the Task
Force recommendations, the three items identified above were not
adopted by the Commission. We revisit some of these issues in the
questions presented below.
Report of the Advisory Committee on the Capital Formation and
Regulatory Process
    Also in 1995, the Commission established the Advisory Committee on
the Capital Formation and Regulatory Processes (``1995 Advisory
Committee'') to advise on, among other things, the regulatory process
and disclosure requirements for public offerings. The 1995 Advisory
Committee's primary recommendation was implementing a system of
``company registration.'' \32\
---------------------------------------------------------------------------

    \32\ Under a ``company registration'' system, a company would,
on a one-time basis, file a registration statement (deemed effective
immediately) that includes information similar to that currently
provided in an initial short-form shelf registration statement. This
registration statement could then be used for all types of
securities and all types of offerings. All current and future
Exchange Act reports would be incorporated by reference into that
registration statement, and around the time of an offering,
transactional and updating disclosures would be filed with the
Commission and incorporated into the registration statement. As part
of this ``company registration'' system, companies would be required
to adopt certain disclosure enhancements (and encouraged to adopt
others) that seek to improve the quality and timeliness of
disclosure provided to investors and the markets. See Securities Act
Concepts and Their Effects on Capital Formation, Release No. 33-7314
(July 25, 1996) [61 FR 40044 (July 31, 1996)] (``Securities Act
Concept Release'').
---------------------------------------------------------------------------

    Noting the Task Force Report, the 1995 Advisory Committee did not
focus on specific line-item disclosure requirements but suggested
disclosure enhancements as part of its recommendations for a system of
``company registration.'' These enhancements included a management
certification to the Commission for all periodic and current reports, a
management's report to the audit committee to be filed as an exhibit to
the Form 10-K, expansion of current reporting obligations on Form 8-K
and a risk factor disclosure requirement in Form 10-K.\33\
---------------------------------------------------------------------------

    \33\ See Report of The Advisory Committee on the Capital
Formation and Regulatory Processes (July 24, 1996), available at
http://www.sec.gov/news/studies/capform.htm.
---------------------------------------------------------------------------

    After receiving reports from both the Task Force and the 1995
Advisory Committee, the Commission issued a concept release on
regulation of the securities offering process and also sought input on
the 1995 Advisory Committee's proposed disclosure enhancements.\34\
---------------------------------------------------------------------------

    \34\ See the Securities Act Concept Release. Many of the issues
raised in the concept release were revisited in the Commission's
1998 proposal to modernize the securities offering process (known as
the ``Aircraft Carrier'' release), and in the Commission's 2005
Securities Offering Reform rulemaking. Some of the proposals from
the Aircraft Carrier release were later adopted. For example, the
Aircraft Carrier release recommended inclusion of risk factor
disclosure in Exchange Act registration statements and annual
reports. This recommendation was adopted as part of Securities
Offering Reform. See The Regulation of Securities Offerings, Release
No. 33-7606A (Nov. 17, 1998) [63 FR 67174 (Dec. 4, 1998)]
(``Aircraft Carrier Release'') and Securities Offering Reform,
Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]
(``Securities Offering Reform Release'').
---------------------------------------------------------------------------

Plain English
    In 1998, the Commission adopted rules intended to improve the
readability of prospectuses by promoting clear, concise and
understandable disclosure (``Plain English Rules'').\35\ These rules
required registrants to write the cover page, summary and risk factors
section of prospectuses in plain English \36\ and were extended to
Exchange Act reports in 2005.\37\
---------------------------------------------------------------------------

    \35\ See Plain English Disclosure, Release No. 33-7497 (Jan. 28,
1998) [63 FR 6370 (Feb. 6, 1998)] (``Plain English Disclosure
Adopting Release'').
    \36\ Id.
    \37\ See Securities Offering Reform Release. As part of the
Securities Offering Reform Release, Form 10-K was amended to require
risk factor disclosure to be written in accordance with the same
Plain English Rules that apply to risk factor disclosure in
Securities Act registration statements. See also Part I, Item 1A of
Form 10-K.
---------------------------------------------------------------------------

Advisory Committee on Improvements to Financial Reporting
    In 2007, the Commission chartered the Advisory Committee on
Improvements to Financial Reporting (``CIFiR Advisory Committee'') to
examine the U.S. financial reporting system.\38\ While the CIFiR
Advisory Committee did not recommend specific changes to Regulation S-
K, several of its suggestions sought to improve the usefulness of
information in periodic reports.\39\ The Commission adopted some of
these suggestions, which included updating the Commission's
interpretive guidance on use of electronic media for disseminating
information on a registrant's financial performance \40\ and adopting
rules to require filing of interactive data-tagged financial
statements.\41\
---------------------------------------------------------------------------

    \38\ The dual goals of the CIFiR Advisory Committee were ``to
examine the U.S. financial reporting system in order to make
recommendations intended to increase the usefulness of financial
information to investors, while reducing the complexity of the
financial reporting system to investors, preparers, and auditors.''
See Final Report of the Advisory Committee on Improvements to
Financial Reporting to the United States Securities and Exchange
Commission (Aug. 1, 2008), (``CIFiR Advisory Committee Report''),
available at http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf.
    \39\ See CIFiR Advisory Committee Report (stating that
``[i]ncreasing the usefulness of information in SEC reports'' was
one of five themes underlying the CIFiR Advisory Committee's
recommendations).
    \40\ In 2008, the Commission published interpretive guidance on
the use of company Web sites as a means for companies to communicate
and provide information to investors in compliance with the federal
securities laws and, in particular, the Exchange Act. See Commission
Guidance on the Use of Company Web sites, Release No. 34-58288 (Aug.
1, 2008) [73 FR 45862 (Aug. 7, 2008)] (``2008 Web site Guidance'').
When it published the 2008 Web site Guidance, the Commission noted
that the guidance was prompted, in part, by the CIFiR Advisory
Committee's efforts.
    \41\ In 2008, the Commission announced the 21st Century
Disclosure Initiative, with the goal of preparing a plan for future
action to modernize the Commission's disclosure system. The
Initiative's report, issued in 2009, recommended a new disclosure
system in which interactive data would replace plain-text disclosure
documents while retaining the substantive content and filing
schedule of the current system. See 21st Century Disclosure
Initiative: Staff Report, Toward Greater Transparency: Modernizing
the Securities and Exchange Commission's Disclosure System (Jan.
2009), available at http://www.sec.gov/spotlight/disclosureinitiative/report.pdf.
    The Commission adopted rules in 2009 requiring companies to
provide financial statement information in interactive data format
using the eXtensible Business Reporting Language (``XBRL'') format.
See Interactive Data to Improve Financial Reporting, Release No. 33-
9002 (Jan. 20, 2009) [74 FR 6776 (Feb. 10, 2009)] (``Interactive
Data Release''). This adopting release notes the CIFiR Advisory
Committee's recommendation to require filing of interactive data-
tagged financial statements.
---------------------------------------------------------------------------

JOBS Act Report on Review of Disclosure Requirements in Regulation S-K
    The JOBS Act required the Commission to review Regulation S-K to
determine how its disclosure requirements can be updated to modernize
and simplify the registration process for EGCs.\42\ In response to this
mandate, Commission staff published the S-K Study in December 2013.
Although the Congressional mandate

focused on EGCs, the report was intended to facilitate the improvement
of disclosure requirements applicable to companies at all stages of
development.\43\
---------------------------------------------------------------------------

    \42\ Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). For a
discussion of EGCs, including the definition of ``emerging growth
company,'' see Section IV.H.1.
    \43\ See S-K Study at 4.
---------------------------------------------------------------------------

    The S-K Study recommended a comprehensive review of disclosure
requirements in the Commission's rules and forms, including Regulations
S-K and S-X, and identified specific areas for further review.\44\ It
also recommended the Commission consider the following principles when
reviewing and evaluating changes to disclosure requirements:
---------------------------------------------------------------------------

    \44\ See id at 92-104. The S-K Study identified four issues for
further study: (1) Generally, any recommended revisions should
emphasize a principles-based approach as an overarching component of
the disclosure framework while preserving the benefits of a rules-
based system; (2) any review of the disclosure requirements should
evaluate the appropriateness of current scaled disclosure
requirements and consider whether further scaling is appropriate for
EGCs or other categories of companies; (3) any review of the
disclosure requirements should evaluate methods of information
delivery and presentation, both through EDGAR and other means; and
(4) any review of disclosure requirements should consider ways to
present information to improve the readability and navigability of
disclosure and explore methods for discouraging repetition and
disclosure of immaterial information. As to this fourth issue, the
S-K Study suggested reevaluating quantitative thresholds and other
materiality standards in Regulation S-K as well as reassessing
requirements for information that is readily accessible, such as
historical stock price information. Id. at 97-98.
---------------------------------------------------------------------------

     Improving and maintaining the informativeness of
disclosure;
     historical objectives of the rule and their continued or
recurring relevance;
     whether the required information is available on a non-
discriminatory basis from reliable sources and, if so, any costs or
benefits from obtaining the information other than from the registrant;
     administrative and compliance costs of the requirements;
     any competitive or economic costs of disclosing
proprietary information;
     maintenance of the Commission's ability to conduct an
effective enforcement program and deter fraud; and
     importance of maintaining investor confidence in the
reliability of registrant information, in order to, among other things,
encourage capital formation.\45\
---------------------------------------------------------------------------

    \45\ See id. at 94-95.
---------------------------------------------------------------------------

FAST Act Disclosure Modernization and Simplification
    Under the FAST Act,\46\ the Commission is required to carry out a
study to determine how best to modernize and simplify the disclosure
requirements in Regulation S-K and to propose revisions to those
requirements.\47\ The FAST Act requires that the study of Regulation S-
K:
---------------------------------------------------------------------------

    \46\ Public Law 114-94, 129 Stat. 1312 (2015).
    \47\ Public Law 114-94, Sec. 72003, 129 Stat. 1312 (2015).
---------------------------------------------------------------------------

     Emphasize a company-by-company approach that allows
relevant and material information to be disseminated to investors
without boilerplate language or static requirements while preserving
completeness and comparability of information across registrants; and
     evaluate methods of information delivery and presentation
and explore methods for discouraging repetition and the disclosure of
immaterial information.
In conducting this study, the Commission is required to consult with
the Investor Advisory Committee and the Advisory Committee on Small and
Emerging Companies and to issue a report of findings and
recommendations to Congress.\48\ The FAST Act also requires the
Commission to revise Regulation S-K to further scale or eliminate
requirements to reduce the burden on EGCs, accelerated filers, smaller
reporting companies (``SRCs''), and other smaller issuers, while still
providing all material information to investors, and to eliminate
duplicative, overlapping, outdated or superseded provisions.\49\
---------------------------------------------------------------------------

    \48\ Id.
    \49\ Public Law 114-94, Sec. 72002, 129 Stat. 1312 (2015). The
required revisions would not apply to provisions for which the
Commission determines that further study is necessary to determine
their efficacy.
---------------------------------------------------------------------------

    Consistent with the S-K Study's recommendations and the FAST Act
mandates, and in furtherance of the Commission's prior modernization
studies and initiatives, we seek to evaluate components of our
disclosure framework and revisit certain of our business and financial
disclosure requirements to assess whether they continue to provide
investors with information that is important to making informed
investment and voting decisions. We also seek to evaluate whether
current disclosure requirements should be revised to include different
formats to facilitate the readability and navigability of disclosure,
which we discuss in Section V of the release.

III. Disclosure Framework

A. Basis for Our Disclosure Requirements

    The Securities Act and the Exchange Act authorize the Commission to
promulgate rules for registrant disclosure as necessary or appropriate
in the public interest or for the protection of investors.\50\ The
Commission has used this authority to require disclosure of information
it believes is important to investors in both registration statements
for public offerings and in ongoing reports.
---------------------------------------------------------------------------

    \50\ See generally, Sections 7, 10, and 19(a) of the Securities
Act [15 U.S.C. 77g(a)(10), 77j; and 77s(a)]; and Sections 3(b), 12,
13, 14, 15(d), and 23(a) of the Exchange Act [15 U.S.C. 78c(b), 78l,
78m(a), 78n(a), 78o(d), and 78w(a)].
---------------------------------------------------------------------------

1. Statutory Mandates
The Securities Act and Exchange Act
    A central goal of the federal securities laws is full and fair
disclosure.\51\ In enacting these laws, Congress recognized that
investors must have access to accurate information important to making
investment and voting decisions in order for the financial markets to
function effectively. Thus, our disclosure rules are intended not only
to protect investors but also to facilitate capital formation and
maintain fair, orderly and efficient capital markets.
---------------------------------------------------------------------------

    \51\ See Preamble of the Securities Act (stating it is an Act to
provide full and fair disclosure of the character of securities sold
in interstate and foreign commerce and through the mails, and to
prevent frauds in the sale thereof, and for other purposes.). In
enacting the mandatory disclosure system under the Exchange Act,
Congress sought to promote complete and accurate information in the
secondary trading markets. See S. Rep. No. 73-1455, 73rd Cong., 2nd
Sess., 1934 at 68 (stating ``[o]ne of the prime concerns of the
exchanges should be to make available to the public, honest,
complete, and correct information regarding the securities listed'')
and H.R. Rep. No. 73-1383, 73rd Cong., 2nd Sess., 1934 at 11
(stating ``[t]here cannot be honest markets without honest
publicity. Manipulation and dishonest practices of the market place
thrive upon mystery and secrecy.'').
---------------------------------------------------------------------------

    Schedule A of the Securities Act sets forth certain items of
disclosure to be included in registration statements filed in public
offerings and provides the basis for many of the disclosure
requirements currently in Regulation S-K. Items in Schedule A are
largely financial in nature and were intended to help investors assess
a security's value. According to the House Report that preceded the
Securities Act:

    The items required to be disclosed . . . are items indispensable
to any accurate judgment upon the value of a security . . . The type
of information required to be disclosed is of a character comparable
to that demanded by competent bankers from their borrowers, and has
been worked out in light of these and other requirements. They are .
. . adequate to bring into full glare of publicity those elements of
real and unreal values which may lie behind a security.\52\

    \52\ H.R Rep. No. 73-85, 73rd Cong., 1st Sess., 1933.
---------------------------------------------------------------------------

The Exchange Act requires similar business and financial information to
be

disclosed in Exchange Act registration statements and periodic
reports.\53\
---------------------------------------------------------------------------

    \53\ See Section 12(b)(1)(A) of the Exchange Act [15 U.S.C.
78l].
---------------------------------------------------------------------------

    In addition to mandating certain disclosure requirements, the
Securities Act and the Exchange Act grant the Commission authority to
modify and supplement these requirements as necessary or appropriate to
implement the purpose of the statutes.\54\ Moreover, whenever it is
engaged in rulemaking and is required to consider whether the action is
necessary or appropriate in the public interest, the Commission must
consider whether the action will promote efficiency, competition, and
capital formation.\55\
---------------------------------------------------------------------------

    \54\ See, e.g., Sections 19(a) and 28 of the Securities Act and
Sections 3(b), 23(a)(1) and 36(a)(1) of the Exchange Act. [15 U.S.C.
77s(a), 15 U.S.C. 77z-3] and [15 U.S.C. 78c(b), 15 U.S.C. 78w(a)(1),
15 U.S.C. 78mm(a)(1)]. Section 19(a) of the Securities Act and
Section 23(a)(1) of the Exchange Act grant the Commission authority
to make such rules and regulations as may be necessary to carry out
the provisions of each title; Section 3(b) of the Exchange Act
provides that the Commission shall have power to define technical,
trade, accounting, and other terms used in the Exchange Act,
consistently with the provisions and purposes of the Exchange Act;
Section 28 of the Securities Act and Section 36(a)(1) of the
Exchange Act provide that the Commission may conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities, or transactions, from any
provision or provisions of each title or of any rule or regulation
thereunder, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
    \55\ See, e.g., Section 2(b) of the Securities Act [15 U.S.C.
77b(b)] and Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)]. See
also Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)].
---------------------------------------------------------------------------

Business and Financial Legislation
    From time to time, Congress has introduced additional disclosure
requirements through other statutory mandates. Recent mandates have
focused on corporate responsibility, corporate governance and providing
enhanced business and financial information to investors. The Sarbanes-
Oxley Act of 2002 (``Sarbanes-Oxley Act'') \56\ mandated numerous
changes to strengthen the accountability of public companies for their
financial disclosure and required substantial Commission rulemaking to
implement its provisions, many of which resulted in additions to
Regulation S-K.\57\ In 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act'') \58\ required the
Commission to adopt an array of disclosure provisions on corporate
governance, executive compensation and specialized disclosure.\59\
---------------------------------------------------------------------------

    \56\ Public Law 107-204, 116 Stat. 745 (2002).
    \57\ See S-K Study at 21-23, footnotes 57-62 and corresponding
text for a discussion of additions made to Regulation S-K as a
result of the Sarbanes-Oxley Act.
    \58\ Public Law 111-203, 124 Stat. 1376 (2010).
    \59\ See S-K Study at 28-29, footnotes 73-77 and corresponding
text for a discussion of provisions in the Dodd-Frank Act that
impact requirements in Regulation S-K.
---------------------------------------------------------------------------

Other Legislation
    In some instances, Congress has mandated disclosure that is not
necessarily financial in nature. These mandates have ranged from broad
policy considerations to prescriptive directives. For example, under
the National Environmental Policy Act of 1969 (``NEPA''),\60\ Congress
required all federal agencies to include consideration of the
environment in regulatory action. In response to this mandate, the
Commission adopted environmental compliance and litigation disclosure
requirements.\61\ Similarly, Section 1503 of the Dodd-Frank Act
required registrants to include information about mine safety and
health in their periodic reports. Although the disclosure requirements
in Section 1503 were self-executing,\62\ the Act authorized the
Commission to issue such rules or regulations as necessary for the
protection of investors and to carry out the purposes of Section
1503.\63\ To facilitate consistent compliance, the Commission adopted
rules to codify the statutory disclosure requirements.\64\ More
recently, the Iran Threat Reduction and Syria Human Rights Act of 2012
(``ITRSHRA'') requires registrants to disclose certain business
activities relating to Iran in their periodic reports.\65\
---------------------------------------------------------------------------

    \60\ 42 U.S.C. 4321-4347.
    \61\ As a result of NEPA, the Commission issued an interpretive
release in 1971 alerting companies to potential disclosure
obligations that could arise from material environmental litigation
and the material effects of compliance with environmental laws. The
Commission later adopted more specific disclosure requirements
relating to these matters and, in 1976, the Commission amended its
forms to require disclosure of any material estimated capital
expenditures for environmental control facilities.
    See Disclosures Pertaining to Matters Involving the Environment
and Civil Rights, Release No. 33-5170 (July 19, 1971) [36 FR 13989
(July 29, 1971)], Disclosure with Respect to Compliance with
Environmental Requirements and Other Matters, Release No. 33-5386
(April 20, 1973) [38 FR 12100 (May 9, 1973)], Disclosure of
Environmental and Other Socially Significant Matters, Release No.
33-5569 (Feb. 11, 1975) [40 FR 7013 (Feb. 18, 1975)] (``Notice of
Public Proceedings on Environmental Disclosure Release''),
Conclusions and Final Action on Rulemaking Proposals Relating to
Environmental Disclosure, Release No. 33-5704 (May 6, 1976) [41 FR
21632 (May 27, 1976)] (``1976 Environmental Release''), Natural
Resources Defense Council et al., v. SEC, 389 F. Supp. 689 (D.D.C.
1974) (``Natural Resources Defense Council'').
    \62\ See Section 1503(f) of the Dodd-Frank Act. The disclosure
requirements took effect 30 days after enactment of the Act.
    \63\ Id. at Section 1503(d)(2).
    \64\ See Mine Safety Disclosure, Release No. 33-9286 (Dec. 21,
2011) [76 FR 81762 (Dec. 28, 2011)] (``Mine Safety Disclosure
Release'').
    \65\ Public Law 112-158, 126 Stat. 1214 (2012). Section 219 of
ITRSHRA amended Section 13 of the Exchange Act to add subsection
(r). This subsection requires a company that files annual and
quarterly reports under Section 13(a) of the Exchange Act to provide
disclosure if, during the reporting period, it or any of its
affiliates knowingly engaged in certain specified activities
involving contacts with or support for Iran or other identified
persons involved in terrorism or the creation of weapons of mass
destruction. ITRSHRA was self-executing and required no substantive
rulemaking by the Commission.
---------------------------------------------------------------------------

2. Commission Responses to Market Developments
    Our disclosure regime includes requirements that we have adopted in
response to market developments or advancements in technology. In
response to the disorderly markets and damage to investors caused by
the hot issue securities markets between 1967 and 1971, the Commission
initiated hearings to determine the adequacy of existing disclosure
requirements \66\ and adopted new disclosure requirements to elicit
more meaningful information concerning all registrants and to
communicate more effectively the economic realities of new
registrants.\67\ Similarly, in 1994 in response to significant and
sometimes unexpected losses in market risk sensitive instruments due
to, among other things, changes in interest rates, foreign currency
exchange rates and commodity prices, the Commission adopted Item 305
(quantitative and qualitative disclosures about market risk).\68\
---------------------------------------------------------------------------

    \66\ Hot issues result when the price of a new issuance of
securities rises to a substantial premium over the initial offering
price immediately or soon after the securities are first distributed
to the public. In 1967-1971, the new issues markets experienced a
resurgence. See Report of the Securities and Exchange Commission
Concerning the Hot Issues Markets, August 1984, available at http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1980/1984_0801_SECHotIssuesT.pdf. Between 1968 and 1970, the
value of stocks traded on national securities exchanges fell a total
of $78.8 billion, from $759.5 billion to $680.7 billion. See
Securities and Exchange Commission, Thirty-Seventh Annual Report,
appendix Table 5 at 221 (1971) available at https://www.sec.gov/about/annual_report/1971.pdf.
    \67\ See New Ventures, Meaningful Disclosure, Release No. 33-
5395 (June 1, 1973) [38 FR 17202 (June 29, 1973)] (``Hot Issues
Adopting Release'').
    \68\ See Disclosure of Accounting Policies for Derivative
Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market
Risk Inherent in Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity Instruments, Release No. 33-
7386 (Jan. 31, 1997) [62 FR 6044 (Feb. 10, 1997)] (``Disclosure of
Market Risk Sensitive Instruments Release'').
---------------------------------------------------------------------------

    Significant advancements in technology have also prompted some of
our disclosure requirements. The

Commission's efforts in Securities Offering Reform recognized the
impact of technology on market demand for more timely corporate
disclosure and the ability of issuers to capture, process, and
disseminate this information.\69\ Similarly, modernization of our oil
and gas rules was intended to update oil and gas disclosure
requirements to align them with current practices and changes in
technology.\70\
---------------------------------------------------------------------------

    \69\ See Aircraft Carrier Release; Securities Offering Reform
Release.
    \70\ See Modernization of Oil and Gas Reporting, Release No. 33-
8995 (Dec. 31, 2008) [74 FR 2157 (Jan. 14, 2009)] (``Oil and Gas
Release'').
---------------------------------------------------------------------------

    We are considering changes to our disclosure requirements and
seeking public input on how our disclosure requirements could be
improved for the benefit of investors and registrants and whether the
requirements could be revised to adapt to future changes in market
conditions and advancements in technology. We also are seeking input on
the utility of mechanisms such as sunset provisions or temporary rules.
a. Comments Received
    S-K Study. One commenter stated that a sunset provision would
require the Commission to consider changes in the economic, business
and regulatory landscape in assessing whether new disclosure
requirements should be made permanent.\71\ For significant new
disclosure requirements, this commenter suggested a sunset provision of
five or ten years and that formal Commission action should be required
to indefinitely extend or modify any significant new disclosure
requirement.
---------------------------------------------------------------------------

    \71\ See letter from Ernst & Young (Sept. 11, 2012) (``Ernst &
Young 1'').
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. We received a few comment
letters that discussed potential regulatory mechanisms to review and
update our disclosure requirements.\72\ To determine the continuing
need for disclosures in light of the then current economic, business
and regulatory landscape, one commenter suggested a formal, post-
adoption review process for significant new disclosure
requirements.\73\ This review process, or ``sunset review,'' would
require formal Commission action to make a new disclosure requirement
permanent. Another commenter recommended that the Commission develop a
mechanism to timely update disclosure requirements to address new
topical issues and to delete existing disclosure when the informational
value for investors is diminished.\74\ One commenter generally
recommended sunset rules and finding a means to evaluate user demand
and disclosure effectiveness for potentially outdated requirements.\75\
---------------------------------------------------------------------------

    \72\ See, e.g., letters from the Society of Corporate
Secretaries and Governance Professionals (Sept.10, 2014)
(``SCSGP''), Securities Industry and Financial Markets Association
(Oct. 13, 2014) (``SIFMA''), and letter and articles referenced
therein from Arthur J. Radin (May 29, 2015) (``A. Radin'').
    \73\ See SCSGP. This commenter also suggested that the staff
issue ``closing guidance'' when topics on which the staff had
previously focused are no longer areas of primary concern. The
commenter cited 2003 MD&A guidance on disclosure of critical
accounting policies estimates as an example of guidance that could
be considered closed. See Commission Guidance Regarding Management's
Discussion and Analysis of Financial Condition and Results of
Operation, Release No. 33-8350 (Dec. 19, 2003) (``2003 MD&A
Interpretive Release'') [68 FR 75056 (Dec. 29, 2003)]. This
commenter stated ``it is not clear that investors are unaware of the
uncertainties associated with the methods, assumptions and estimates
underlying a company's critical accounting measurements.''
    \74\ See SIFMA. This commenter did not propose a particular
mechanism that the Commission should use.
    \75\ See A. Radin.
---------------------------------------------------------------------------

b. Discussion
    When adopting disclosure requirements that have departed from
traditional disclosure concepts, the Commission has historically taken
an incremental approach to change by first adopting modest revisions
and then expanding their application after observing and evaluating the
rules' effectiveness. For example, the initial adoption of simplified
registration and reporting requirements for smaller businesses on Form
S-18 were ``in the nature of an experiment'' \76\ and a departure from
traditional disclosure concepts.\77\ After observing relative,
widespread acceptance of Form S-18 and the absence of significant
disclosure or enforcement problems, the Commission expanded the form's
availability,\78\ and it eventually served as a model for our current
system of scaled disclosure for SRCs.\79\
---------------------------------------------------------------------------

    \76\ See Simplified Registration and Reporting Requirements for
Small Issuers, Release No. 33-6049 (Apr. 3, 1979) [44 FR 21562 (Apr.
10, 1979)] (``Form S-18 Release'') at 21564.
    \77\ Id. at 21562 (``The Commission will monitor closely the use
of Form S-18 for an appropriate period . . .'').
    \78\ See Availability of Simplified Registration Form to Certain
Mining Companies, Release No. 33-6299 (Mar. 27, 1981) [46 FR 18947
(Mar. 27, 1981)]. See also Revisions to the Optional Form for the
Registration of Securities to Be Sold to the Public by the Issuer
for an Aggregate Cash Price Not To Exceed $5,000,000, Release No.
33-6406 (June 4, 1982) [47 FR 25126 (June 10, 1982)] (expanding Form
S-18's availability to non-corporate registrants and registrants
engaged, or to be engaged, in oil and gas related operations).
    \79\ See Smaller Reporting Company Regulatory Relief and
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan.
4, 2008)] (``SRC Adopting Release''). In adopting the current scaled
disclosure regime, the Commission stated ``[t]he amendments that we
are adopting address the need to revisit and adjust the Commission's
small company policies to reflect changes in our securities markets
as well as changes to the regulatory landscape since 1992, when the
Commission first adopted an integrated scaled disclosure system for
small business in Regulation S-B. The Commission adopted Regulation
S-B and its associated Forms SB-1 and SB-2 based upon the success of
Form S-18 . . .''
---------------------------------------------------------------------------

    The Commission has, on occasion, adopted temporary rules or rules
with automatic sunset provisions to better assess the effect of or
necessity for a particular rule before adopting the rule on a permanent
basis. For example, Securities Act Rule 415, which permits delayed and
continuous offerings under certain circumstances, was initially adopted
on a temporary basis for a period of nine months during which the
Commission monitored the operation and impact of the new rule.\80\
Following public hearings and comment on Rule 415, the Commission
determined additional experience with the rule was necessary to study
its operation and impact \81\ and extended the temporary nature of this
rule.\82\ The Commission permanently adopted Rule 415 following 18
months of monitoring the operation and impact of the rule.\83\
---------------------------------------------------------------------------

    \80\ See 1982 Integrated Disclosure Adopting Release.
    \81\ See Delayed or Continuous Offering and Sale of Securities,
Release No. 33-6423 (Sept. 2, 1982) [47 FR 39799 (Sept. 10, 1982)].
    \82\ Id. In June 1983, the Commission published the shelf
registration rule for comment again in order to provide all
interested parties another opportunity to share their views and
experience under the Rule before the Commission made its final
determination. See Delayed or Continuous Offering and Sale of
Securities, Release No. 33-6470, (June 9. 1983) [48 FR 27768 (June
17, 1983)].
    \83\ See Shelf Registration, Release No. 33-6499 (Nov. 17, 1983)
[48 FR 52889 (Nov. 23, 1983)].
---------------------------------------------------------------------------

    While the Commission acted to permanently adopt Rule 415, it has
allowed other temporary rules to expire. The Commission adopted on a
temporary basis Securities Act Rules 702 and 703. Rule 702 required the
filing of a Form 701 after sales under Rule 701 exceeded a particular
threshold. Rule 703 disqualified registrants from relying on the Rule
701 exemption from registration where the registrant failed to make the
filing required by Rule 702.\84\ In adopting Rules 702 and 703, the
Commission noted the importance of monitoring new exemptive provisions
and stated that it would use Form 701 to ``assess the utility of the
exemption and, oversee

any abuses.'' \85\ The Commission did not extend Rules 702 and 703
based on its belief that the sunset of these rules had not compromised
investor interests and that their reinstitution of the rules would
serve little purpose.\86\
---------------------------------------------------------------------------

    \84\ See Compensatory Benefit Plans and Contracts, Release No.
33-6768 (Apr. 14, 1988) [53 FR 12918 (Apr. 20, 1988)] (adopting Rule
701, an exemption from registration for certain offers and sales
made pursuant to the terms of compensatory benefit plans or written
compensation agreements for issuers that are not subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act,
and adopting rules 702 and 703 on a temporary basis of five years).
    \85\ See Regulation D Revisions; Exemption for Certain Employee
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan.
30, 1987)] at 3021.
    \86\ See Phase One Recommendations of Task Force on Disclosure
Simplification Release.
---------------------------------------------------------------------------

    Even in the absence of a temporary rule or sunset provision, the
Commission has undertaken efforts to study the effects of new rules or
amendments. The Commission uses these studies to guide future
amendments or rulemaking. For example, our staff has examined the
effects on capital formation through private placements after adoption
of amendments to Regulation D in accordance with the JOBS Act.\87\ In
adopting amendments to Rule 506 of Regulation D \88\ to eliminate the
prohibition against general solicitation for a subset of Rule 506
offerings, the Commission stated that the staff will monitor
developments in the market for these offerings.\89\ In addition, in
connection with recently adopted amendments to Regulation A, an
exemption from registration for smaller issues of securities, and the
adoption of Regulation Crowdfunding, a new exemption for smaller
securities offerings using the Internet through crowdfunding, the
Commission stated, in each case, that the staff will study and submit a
report to the Commission on the impact of the regulation on capital
formation and investor protection.\90\
---------------------------------------------------------------------------

    \87\ Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov,
Capital Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009-2014, Oct. 2015, available
at https://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf.
    \88\ 17 CFR 230.506.
    \89\ See Eliminating the Prohibition Against General
Solicitation and General Advertising in Rule 506 and Rule 144A
Offerings, Release No. 33-9415 (July 20. 2013) [78 FR 44771 (July
24, 2013)].
    \90\ See Amendments to Regulation A, Release No. 33-9741 (Mar.
25, 2015) [80 FR 21805 (Apr. 20, 2015)] (``2015 Regulation A
Release''); See Crowdfunding, Release No. 33-9974 (Oct. 30, 2015)
[80 FR 71387 (Nov. 16, 2015)] (``Crowdfunding Adopting Release'').
When proposing the crowdfunding rules, the Commission directed the
staff to develop a work plan to review and monitor use of the
crowdfunding rules, focusing on the types of issuers using the
exemption, level of compliance by issuers and intermediaries, and
whether the exemption is promoting new capital formation while
providing key protections for investors. See Crowdfunding, Release
No. 33-9470 (Oct. 23, 2013) [78 FR 66427 (Nov. 5, 2013)].
---------------------------------------------------------------------------

    Requiring affirmative Commission action to extend or make permanent
certain requirements, the utility of which may change over time, could
require us to more frequently consider the effectiveness of our
requirements. Alternatively, the Commission could commit to studying
the impact of certain rule changes on a specified schedule, without
making the rules temporary or applying automatic sunset provisions. Any
such review would be in addition to the periodic review currently
required by the Regulatory Flexibility Act (``RFA''),\91\ under which
the Commission reviews its rules that have a significant economic
impact on a substantial number of small entities within ten years of
their publication as final rules.\92\ These approaches would, however,
require significant Commission resources and could compete with other
Commission priorities.
---------------------------------------------------------------------------

    \91\ [5 U.S.C. 610(a)].
    \92\ Each year, since 1981, the Commission provides the public
with notice that these rules are scheduled for review and invites
public comment on whether the rules should be continued without
change, or should be amended or rescinded to minimize any
significant economic impact of the rules upon a substantial number
of such small entities. As a matter of policy, the Commission
reviews all final rules that are published for notice and comment to
assess not only their continued compliance with the RFA, but also to
assess generally their continued utility. See, e.g., List of Rules
to be Reviewed Pursuant to the Regulatory Flexibility Act, Release
No. 33-9965 (Oct. 22, 2015) [80 FR 65973 (Oct. 28, 2015)]. In the
past, the Commission has received little or no comment on the rules
that it publishes for review.
---------------------------------------------------------------------------

c. Request for Comment
    1. Should the Commission consider including automatic sunset
provisions in new disclosure requirements? If so, what types of
disclosure requirements should include these provisions? What factors
should we consider in identifying them? What would be an appropriate
length of time for any sunset provisions? Would this length of time
vary with the nature of the rule in question?
    2. What are the advantages and disadvantages of automatic sunset
provisions? Would automatic sunset provisions result in unnecessary
regulatory uncertainty for investors or registrants?
    3. How would the use of automatic sunset provisions affect
registrants, investors and other users of disclosure? Would
registrants, investors or other users incur increased costs associated
with the use of automatic sunset provisions?
    4. Should we consider requiring the staff to study and report to
the Commission on the impact of new disclosure requirements when
adopting them, in addition to the review the Commission performs under
the RFA? For what type of disclosure requirements would such an
approach be appropriate? What are the advantages and disadvantages of
such a study and report on a new rule?
    5. Are there other ways our disclosure requirements could be
revised to adapt more easily to future market changes and technological
advancements?

B. Nature of Our Disclosure Requirements

    The concept of materiality has been described as ``the
cornerstone'' of the disclosure system established by the federal
securities laws.\93\ Schedule A to the Securities Act identifies
certain categories of information that are generally viewed as material
to investors.\94\ Those categories are incorporated and expanded upon
in the categories of information that registrants are required to
disclose under Regulation S-K.
---------------------------------------------------------------------------

    \93\ See Sommer Report at 320.
    \94\ See id. at 324.
---------------------------------------------------------------------------

    In creating and implementing our system of integrated disclosure,
identification of material information was one of two principal
objectives. In the 1982 Integrated Disclosure Adopting Release, the
Commission stated:

    The Commission's program to integrate the disclosure systems has
focused on two principal objectives: First, a comprehensive
evaluation of the disclosure policies and procedures under both Acts
to identify the information which is material to security holders
and investors in both the distribution process and the trading
markets . . . and, second, a determination of the circumstances
under which information should be disseminated to security holders,
investors and the marketplace.\95\
---------------------------------------------------------------------------

    \95\ See 1982 Integrated Disclosure Adopting Release at 11382.
See also Proposed Comprehensive Revision to System for Registration
of Securities of Securities Offerings, Rel. No. 33-6235 (Sept. 2,
1980) [45 FR 63693 (Sept. 25, 1980)] (``1980 Proposed Revisions'')
at 63694. This proposing release states ``[t]he shape of the
[Commission's integrated disclosure] program will be influenced by
the answer to two fundamental questions: (1) What information is
material to investment decisions in the context of public offerings
of securities; and (2) Under what circumstances and in what form
should such material information be disseminated and made available
by companies making public offerings of securities to the various
participants in the capital market system? The task of identifying
what information is material to investment and voting decisions is a
continuing one in the field of securities regulation.''

    The Commission adopted line-item requirements in Regulation S-K and
its predecessors to provide investors with specific disclosure within
broad categories of material information.\96\ Through its disclosure
requirements, the Commission has adopted different approaches to guide
registrants in

evaluating materiality for purposes of disclosure, including in some
cases using quantitative thresholds to address uncertainty in the
application of materiality.
---------------------------------------------------------------------------

    \96\ See Sommer Report at 324.
---------------------------------------------------------------------------

1. Principles-Based and Prescriptive Disclosure Requirements
    Principles-based disclosure requirements. Many of our rules require
disclosure when information is material to investors.\97\ These rules
rely on a registrant's management to evaluate the significance of
information in the context of the registrant's overall business and
financial circumstances and determine whether disclosure is
necessary.\98\ The requirements are often referred to as ``principles-
based'' because they articulate a disclosure objective and look to
management to exercise judgment in satisfying that objective.\99\
---------------------------------------------------------------------------

    \97\ On several occasions, the Commission has reiterated that
its requirements seek disclosure of material information. See, e.g.,
Commission Guidance Regarding Disclosure Related to Climate Change,
Release No. 33-9106 (Feb. 8, 2010) [75 FR 6290 (Feb. 8, 2010)]
(``Climate Change Release'') at 6292-6293 (stating ``During the
1970s and 1980s, materiality standards for disclosure under the
federal securities laws also were more fully articulated. Those
standards provide that information is material if there is a
substantial likelihood that a reasonable investor would consider it
important in deciding how to vote or make an investment decision,
or, put another way, if the information would alter the total mix of
available information.''); Statement of the Commission Regarding
Disclosure of Year 2000 Issues and Consequences by Public Companies,
Investment Advisers, Investment Companies, and Municipal Securities
Issuers, Release No. 33-7558 (Jul. 29, 1998) [63 FR 41394 (Aug. 4,
1998)] (``Year 2000 Release'') at 41395 (stating ``Our disclosure
framework requires companies to disclose material information that
enables investors to make informed investment decisions.''); Timely
Disclosure of Material Corporate Events, Release No. 33-5092 (Oct.
15, 1970) [35 FR 16733 (Oct. 29, 1970)] at 16733-16734
(``Notwithstanding the fact that a company complies with such
[annual, semi-annual and current] reporting requirements, it still
has an obligation to make full and prompt announcements of material
facts regarding the company's financial condition . . . Corporate
managements are urged to review their policies with respect to
corporate disclosure and endeavor to set up procedures which will
insure that prompt disclosure be made of material corporate
developments . . .''). See also infra note 107.
    \98\ See Sommer Report at 322 (``Although the initial
materiality determination is management's, this judgment is, of
course, subject to challenge or question by the Commission or in the
courts.'').
    \99\ See Study Pursuant to Section 108(d) of the Sarbanes-Oxley
Act of 2002 on the Adoption of a Principles-Based Accounting System,
July 2003, available at https://www.sec.gov/news/studies/principlesbasedstand.htm (``Section 108 Study'').
---------------------------------------------------------------------------

    For example, Item 303(a)(2) requires registrants to disclose
material commitments for capital expenditures, known material trends in
the registrant's capital resources, and expected material changes in
the mix and relative cost of such resources.\100\ Similarly, Item
101(c)(1)(xi) requires registrants to disclose the estimated amount
spent during each of the last three fiscal years on company-sponsored
research and development activities, if material.\101\
---------------------------------------------------------------------------

    \100\ Item 303(a)(2) of Regulation S-K [17 CFR 229.303(a)(2)].
    \101\ Item 101(c)(1)(xi) of Regulation S-K [17 CFR
229.101(c)(1)(xi)].
---------------------------------------------------------------------------

    Prescriptive disclosure requirements. Some of our rules employ
objective, quantitative thresholds to identify when disclosure is
required, or require registrants to disclose information in all cases.
These requirements are sometimes referred to as ``prescriptive'' or
``rules-based'' because they rely on bright-line tests rather than
management's judgment to determine when disclosure is required.
    For example, disclosure requirements specific to environmental
proceedings in Item 103 enumerate thresholds for disclosure based on a
percentage of current assets (10%) or a specified dollar amount
($100,000).\102\ Meeting or exceeding the applicable thresholds
necessitates disclosure. Similarly, Item 101(c)(1)(i), requires
registrants to disclose for each of the last three fiscal years the
amount or percentage of total revenue contributed by any class of
similar products or services which accounted for ten percent or more of
consolidated revenue in any of the last three fiscal years or fifteen
percent or more of consolidated revenue, if total revenue did not
exceed $50 million during any of such fiscal years.\103\ As another
example, Item 703 establishes a requirement for registrants to disclose
all repurchases of equity securities by issuers and affiliated
purchasers.\104\
---------------------------------------------------------------------------

    \102\ Instructions 5.B and 5.C to Item 103 of Regulation S-K [17
CFR 229.103]. See also infra note 120.
    \103\ Item 101(c)(1)(i) of Regulation S-K [17 CFR
229.101(c)(1)].
    \104\ Item 703 of Regulation S-K [17 CFR 229.703].
---------------------------------------------------------------------------

    Materiality. The concept of materiality is used throughout the
federal securities laws. The Commission has used a definition of
materiality since at least 1937. Previously, the Commission defined
``material,'' when used to qualify a requirement for the furnishing of
information, as ``those matters as to which an average prudent investor
ought reasonably to be informed before buying or selling the security
registered.'' \105\ In 1982, the Commission revised Rule 12b-2, which
defines ``material'' when used to qualify a requirement for the
furnishing of information, to adopt the Supreme Court's definition of
materiality.\106\
---------------------------------------------------------------------------

    \105\ Proposed Revisions of Regulation C, Registration and
Regulation 12B, Registration and Reporting, Release No. 33-6333
(August 6, 1981) [46 FR 41971 (Aug. 18, 1981)] (``1981 Proposed
Revisions''). The proposing release notes that, prior to proposing
this definition, the definition of ``material'' was the same as
adopted in 1937. This definition provided ``[t]he term `material',
when used to qualify a requirement for the furnishing of information
as to any subject, limits the information required to those matters
as to which an average prudent investor ought reasonably to be
informed before buying or selling the security registered.'' See,
e.g., Adoption of Amendments to General Rules and Regulations,
Release No. 34-4194 (Dec. 17, 1948) [not published in the Federal
Register] (``1948 Adoption of Amendments to General Rules and
Regulations Release'').
    \106\ See 1982 Integrated Disclosure Adopting Release. Rule 12b-
2 of the Exchange Act provides that the term ``material,'' when used
to qualify a requirement for the furnishing of information as to any
subject, limits the information required to those matters to which
there is a substantial likelihood that a reasonable investor would
attach importance in determining whether to buy or sell the
securities registered. [17 CFR 240.12b-2].
    In addition to the information required to be disclosed,
Exchange Act Rule 12b-20 requires registrants to disclose such
further material information, if any, as may be necessary to make
the required statements, in the light of the circumstances under
which they are made, not misleading. Rule 12b-20 of the Exchange Act
[17 CFR 240.12b-20].
---------------------------------------------------------------------------

    The Court has held that information is material if there is a
substantial likelihood that a reasonable investor would consider the
information important in deciding how to vote or make an investment
decision.\107\ The Court further explained that information is material
if there is a substantial likelihood that disclosure of the omitted
fact would have been viewed by the reasonable investor as having
significantly altered the ``total mix'' of information available.\108\
---------------------------------------------------------------------------

    \107\ See Basic Inc. v. Levinson, 485 U.S. 224 (1988) (``Basic''
or ``Basic v. Levinson'') at 231, quoting TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438 (1976) (``TSC Industries'') at 449. In
TSC Industries, the Supreme Court adopted a standard for materiality
in connection with proxy statement disclosure under Schedule 14A and
Rule 14a-9 of the Exchange Act. This standard was supported by the
Commission. See TSC Industries at footnote 10 (``. . . the SEC's
view of the proper balance between the need to insure adequate
disclosure and the need to avoid the adverse consequences of setting
too low a threshold for civil liability is entitled to consideration
. . . The standard we adopt is supported by the SEC.''). In Basic,
the Court reaffirmed this standard of materiality and applied it in
the Section 10(b) and Rule 10b-5 context. Exchange Act Rule 10b-5(b)
prohibits any person from making an untrue statement of material
fact or omitting a material fact necessary to make the statements
made, in light of the circumstances under which they were made, not
misleading in connection with the offer or sale of any security.
Rule 10b-5 of the Exchange Act [17 CFR 240.10b-5].
    \108\ See Matrixx Initiatives, Inc. v. Siracusano, 131 U.S. 1309
(2011) (``Matrixx Initiatives'') at 1318, quoting TSC Industries at
449. In Matrixx Initiatives, the Court applied the materiality
standard, as set forth in TSC Industries and Basic. In articulating
these standards, the Supreme Court recognized that setting too low
of a materiality standard for purposes of liability could cause
management to ``bury shareholders in an avalanche of trivial
information.'' Id. at 1318, quoting TSC Industries at 448-449.

---------------------------------------------------------------------------

    In proposing to revise Rule 12b-2 to adopt the Court's definition
of ``material,'' the Commission noted the trend to apply the Court's
definition in every type of federal securities law violation and
concluded that the same test would be applied for any purpose under the
Securities Act and the Exchange Act.\109\ Although some commenters
recommended retaining the current definition or modifying the proposed
one, the Commission adopted the definition as proposed because it was
based on the definition set forth by the Court.\110\
---------------------------------------------------------------------------

    \109\ See id.
    \110\ See 1982 Integrated Disclosure Adopting Release.
    Article 1-02(o) of Regulation S-X retains the definition of
``material'' prior to TSC Industries. In Staff Accounting Bulletin
No. 99, the staff indicated that it views this definition in
Regulation S-X to be similar to the definitions of ``material'' in
Rule 12b-2 of the Exchange Act and Rule 405 of the Securities Act,
which are consistent with TSC Industries. See footnote 6 of Staff
Accounting Bulletin No. 99, Release No. SAB 99 (Aug. 12, 1999) [64
FR 45150 (Aug. 19, 1999)] (``SAB 99''). As with any staff guidance
referenced in this release, the views of the staff are not rules or
interpretations of the Commission. The Commission has neither
approved nor disapproved the views of the staff.
---------------------------------------------------------------------------

    From time to time, the Commission has provided guidance to assist
management in the types of assessments to make and issues to consider
in determining whether information is material.\111\ For example, based
on a review of MD&A disclosure to evaluate the adequacy of disclosure
practices and identify any common deficiencies, the Commission provided
interpretive guidance on assessments management should make to
determine whether disclosure of forward-looking information is required
under Item 303 of Regulation S-K.\112\ Similarly, in the context of
determining whether financial statements must be restated, Commission
staff has expressed the view that materiality determinations cannot be
reduced to a numerical formula and evaluations of materiality require
both quantitative and qualitative considerations.\113\
---------------------------------------------------------------------------

    \111\ See, e.g., Climate Change Release (providing guidance as
to how registrants should evaluate climate change-related issues
when considering what information to disclose to investors under
existing disclosure requirements and confirming that, if material,
registrants should provide climate change-related disclosure); 2003
MD&A Interpretive Release (providing guidance on MD&A and
emphasizing that registrants should focus on materiality).
    \112\ See, e.g., Management's Discussion and Analysis of
Financial Condition and Results of Operations; Certain Investment
Company Disclosures, Release No. 33-6835 (May 18, 1989) [54 FR 22427
(May 24, 1989)] (``1989 MD&A Interpretive Release'') (setting forth
a two-step analysis for disclosure of material forward-looking
information in MD&A). For a discussion of the Commission's forward-
looking guidance under Item 303 of Regulation S-K and recent court
of appeals decisions, see Section IV.B.3.c.
    \113\ See SAB 99.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. We received three comment letters that discussed
principles-based requirements or made recommendations about
quantitative disclosure thresholds.\114\ Two commenters suggested that
we move towards a more principles-based disclosure regime in which
``companies [would be] expected to take the initiative to identify
material information rather than simply respond to an extensive list of
potentially relevant line-item disclosure requirements.'' \115\ Another
commenter stated that it is counterintuitive to define disclosure
requirements using a ``one-size-fits-all quantitative thresholds.''
\116\
---------------------------------------------------------------------------

    \114\ See letters from Fenwick & West LLP, Cooley LLP and Wilson
Sonsini Goodrich & Rosati, PC (June 19, 2012) (``Silicon Valley''),
Mike Liles (Apr. 10, 2013) (``M. Liles'') (endorsing the comments
expressed in the Silicon Valley letter) and Ernst & Young 1.
    \115\ See Silicon Valley and M. Liles.
    \116\ See Ernst & Young 1.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Several commenters addressed
whether disclosure requirements should be principles-based or
prescriptive.\117\ The majority of these commenters supported a
principles-based system.\118\ Some of these commenters suggested
revising or eliminating existing prescriptive disclosure
requirements.\119\ One of these commenters stated that the ``touchstone
for any disclosure requirement must be materiality as seen through the
eyes of a reasonable investor'' and suggested reviewing the
quantitative disclosure thresholds in Items 103 and 404 of Regulation
S-K \120\ to consider whether they are appropriate.\121\ Another one of
these commenters suggested amending Item 10 \122\ of Regulation S-K to
permit registrants to omit information otherwise required by Regulation
S-K if the information is not material and if the inclusion of the
information is not necessary to make any required statements not
materially misleading.\123\ However, this commenter noted that this
provision should not apply in all instances.\124\ This commenter also
suggested revisions to some of the quantitative disclosure thresholds
in Regulation S-K to ``better calibrate'' such requirements \125\ and
recommended that the Commission determine whether disclosure standards
other than materiality should be harmonized to ``lessen ambiguity as to
how these undefined disclosure standards should be applied.'' \126\
---------------------------------------------------------------------------

    \117\ See, e.g., letters from Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce (July 29, 2014) (``CCMC'')
(expressing support for a more principles-based approach to
disclosure); SCSGP (recommending that we eliminate line-item
disclosure requirements that apply without regard to materiality or
that contain quantitative disclosure thresholds that do not
appropriately reflect materiality); Standards & Financial Market
Integrity Division, CFA Institute (Nov. 12, 2014) (``CFA
Institute'') (stating that a principles-based system could lead to
standards that are inconsistently applied); Shearman & Sterling LLP
(Nov. 26, 2014) (``Shearman'') (stating that a principles-based
approach would better withstand the pace at which the business
environment changes); letter from the Federal Regulation of
Securities Committee, Business Law Section, American Bar Association
(Mar. 6, 2015) (``ABA 2''); UK Financial Reporting Council (Mar. 10,
2015) (``UK Financial Reporting Council''); Corporate Governance
Committee of the Business Roundtable (Apr. 5, 2015) (``Business
Roundtable''); A. Radin.
    \118\ See, e.g., CCMC; SCSGP; ABA 2; Shearman; UK Financial
Reporting Council; Business Roundtable.
    \119\ See, e.g., CCMC; SCSGP; Shearman; ABA 2.
    \120\ Item 103 of Regulation S-K requires disclosure of material
pending legal proceedings. Instruction 2 specifies that no
information need be given with respect to a proceeding that involves
primarily a claim for damages if the amount involved, exclusive of
interest and costs, does not exceed ten percent of current assets of
the registrant and its subsidiaries on a consolidated basis.
    Instruction 5 to Item 103 requires disclosure of proceedings
related to federal, state, or local environmental protection laws
when (i) the proceeding is material to the registrant's business or
financial condition; (ii) the proceeding involves primarily a claim
for damages, or involves potential monetary sanctions, capital
expenditures, deferred charges or charges to income and the amount
involved, exclusive of interest and costs, exceeds ten percent of
current assets of the registrant and its subsidiaries on a
consolidated basis; or (iii) a governmental authority is a party to
a proceeding involving monetary sanctions, unless the registrant
believes that the proceeding will result in no monetary sanctions,
or in monetary sanctions, exclusive of interests and costs, of less
than $100,000. [17 CFR 229.103].
    Item 404 requires disclosure of transactions with related
parties where the related party had or will have a direct or
indirect material interest and the amount involved exceeds $120,000
or, in the case of SRCs, where the amount involved exceeds the
lesser of $120,000 or one percent of the average of the SRC's total
assets at year end for the last two completed fiscal years. [17 CFR
229.404].
    \121\ See CCMC (noting that quantitative thresholds similar to
the ones in Item 103 ``may not in fact be set at levels material for
all, or even most companies'').
    \122\ Item 10 of Regulation S-K contains general requirements on
the application of Regulation S-K, Commission policies on
projections and security ratings, incorporation by reference and the
use of non-GAAP financial measures in Commission filings. [17 CFR
229.10].
    \123\ See ABA 2.
    \124\ See id. (citing the $120,000 threshold in Item 404 as an
example of an instance in which the use of a quantitative disclosure
threshold is appropriate).
    \125\ See id. For example, this commenter suggested increasing
the quantitative threshold in Instruction 5.C to Item 103 from
$100,000 to $1,000,000.
    \126\ Id. As an example, this commenter noted that ``major'' is
used as a standard in Items 101(h)(4)(vi), 102, and
601(b)(10)(ii)(B).

---------------------------------------------------------------------------

    Two commenters stated that a principles-based approach would
provide additional flexibility to registrants by allowing them to
disclose material information based on all relevant facts and
circumstances.\127\ One commenter, in lieu of creating new item
requirements, encouraged greater staff guidance through disclosure
guidance topics or staff bulletins to provide companies with factors to
consider when making materiality determinations.\128\ One commenter
stated that using materiality as a guiding principle ``carries with it
the recognition that what is important to a reasonable investor may
change over time.'' \129\ Another commenter suggested that accounting
professionals should readdress the concept of materiality and this
would help reduce the volume of unnecessary disclosure.\130\
---------------------------------------------------------------------------

    \127\ See SCSGP; Shearman.
    \128\ See SCSGP.
    \129\ See Business Roundtable.
    \130\ See A. Radin.
---------------------------------------------------------------------------

    One commenter opposed a principles-based system, stating such a
system could result in inconsistent application of the principles-based
threshold and thus non-comparable information across companies.\131\
This commenter also stated that the use of prescriptive disclosure
requirements does not prevent companies from including additional
principles-based disclosure if the company would like to do so.\132\
---------------------------------------------------------------------------

    \131\ See CFA Institute (also citing MD&A disclosure during the
financial crisis as evidence that principles-based reporting
requirements alone are not sufficient).
    \132\ Id.
---------------------------------------------------------------------------

b. Discussion
    In 2003, the staff prepared a study on the adoption of a
principles-based accounting system.\133\ Although it did not address
disclosure requirements under Regulation S-K, many of the study's
conclusions may be relevant to our general consideration of principles-
based disclosure standards. The study found drawbacks to establishing
accounting standards on either a rules-based or a principles-based
approach.\134\ The study noted that principles-only standards may
present enforcement difficulties because they are, by their nature,
imprecise.\135\ They can also result in a significant loss of
comparability among reporting entities. Prescriptive standards, on the
other hand, can be circumvented more easily by structuring around the
bright-line requirements of the standard.\136\
---------------------------------------------------------------------------

    \133\ See Section 108 Study. Section 108(d) of the Sarbanes-
Oxley Act directed the Commission to conduct a study on the adoption
by the United States financial reporting system of a principles-
based accounting system.
    \134\ See Section 108 Study.
    \135\ See id.
    \136\ See id.
---------------------------------------------------------------------------

    In the S-K Study, the staff stated that any recommended revisions
to Regulation S-K should emphasize a principles-based approach as an
overarching component of the disclosure framework while preserving the
benefits of a rules-based system, which affords consistency,
completeness and comparability across registrants.\137\ In assessing
this recommendation, we recognize the merits and drawbacks of our
principles-based and prescriptive disclosure requirements.
---------------------------------------------------------------------------

    \137\ See S-K Study at 98.
---------------------------------------------------------------------------

    Limiting prescriptive disclosure requirements and emphasizing
principles-based disclosure could improve disclosure by reducing the
amount of information that may be irrelevant, outdated or immaterial.
Because prescriptive disclosure requirements may result in disclosure
that is not necessarily material or important to investors, greater use
of principles-based disclosure requirements may allow registrants to
more effectively tailor their disclosure to provide only the
information about their specific business and financial condition that
is important to investors. A principles-based approach also may allow
registrants to readily adapt their disclosure to facts and
circumstances that may change over time.
    On the other hand, reducing prescriptive disclosure requirements
and shifting towards more principles-based disclosure requirements may
limit the comparability, consistency and completeness of disclosure.
Also, in the absence of clear guidelines for determining when
information is material, registrants may have difficulty applying
principles-based disclosure requirements,\138\ and the disclosure
provided may not give investors sufficient insight into how registrants
apply different principles-based disclosure thresholds. Potentially
important information that may be disclosed in response to a
prescriptive disclosure requirement might not be included in response
to a principles-based disclosure requirement. In the context of
accounting standards, some have noted practical challenges associated
with principles-based standards as ``auditors and accountants may be
less able to predict how regulators or courts will apply these
principles in particular contexts.'' \139\ Additionally, the use of
prescriptive disclosure requirements does not prevent registrants from
including additional, principles-based disclosures that the registrant
deems important.
---------------------------------------------------------------------------

    \138\ See Financial Reporting Council, Cutting Clutter,
available at https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Cutting-Clutter-Combating-clutter-in-annual-report.pdf. In this
report, the Financial Reporting Council, the United Kingdom's
independent regulator responsible for corporate governance and
reporting, refers to a ``threshold'' problem, and lists the many
words used to describe when disclosure is required. The report
listed the following descriptors triggering disclosure: Critical,
essential, fundamental, important, key, main, major, primary,
principal, and significant. Id. The Financial Reporting Council's
report pertains to the requirements of companies listed in the
United Kingdom, but there are similarly several disclosure
``thresholds'' used in Regulation S-K.
    \139\ See C. Coglianese, E. Keating, M. Michael and T. Healey,
The Role of Government in Corporate Governance, NYU Journal of Law &
Business 1: 233-251 (2004).
---------------------------------------------------------------------------

    The Section 108 Study proposed a third alternative for developing
new accounting standards, which the staff referred to as an
``objectives-oriented'' approach.\140\ Under this approach, standard
setters would develop new rules by clearly articulating the accounting
objective of the standard and providing sufficient detail and structure
so that the standard can be applied on a consistent basis. The staff
further recommended that such standards should be based on a
consistently-applied conceptual framework, minimize exceptions and
avoid the use of bright-line tests.\141\ We are soliciting comment
below on whether such an approach might be appropriate for business and
financial disclosures.
---------------------------------------------------------------------------

    \140\ See Section 108 Study.
    \141\ See id.
---------------------------------------------------------------------------

c. Request for Comment
    6. Should we revise our principles-based rules to use a consistent
disclosure threshold? If so, should a materiality standard be used or
should a different standard, such as an ``objectives-oriented''
approach or any other approach, be used? If materiality should be used,
should the current definition be retained? Should we consider a
different definition of materiality for disclosure purposes? If so, how
should it be defined?
    7. Should we limit prescriptive disclosure requirements and
emphasize a principles-based approach? If so, how? How can we most
effectively balance the benefits of a principles-based approach while
preserving the benefits of prescriptive requirements?
    8. What are the advantages and disadvantages of a principles-based
approach? Would a principles-based approach increase the usefulness of
disclosures? What would be the costs and benefits of such an approach
for investors and registrants?

    9. Do registrants find it difficult to apply principles-based
requirements? Why? If they are uncertain about whether information is
to be disclosed, do registrants err on the side of including or
omitting the disclosure? If registrants include disclosure beyond what
is required, does the additional information obfuscate the information
that is important to investors? Does it instead provide useful
information to investors?
    10. Do registrants find quantitative thresholds helpful in
preparing disclosure? Do such thresholds elicit information that is
important to investors? Do they require registrants to provide some
disclosure that investors do not need? To the extent our rules contain
quantitative thresholds, how should we define them? Are specified
dollar amounts more or less effective than amounts based on a
registrant's financial condition, such as a percentage of revenues or
assets?
    11. Should we develop qualitative thresholds for disclosure? Should
there be a combination of quantitative and qualitative thresholds?
    12. Do registrants find principles-based disclosure requirements
helpful in preparing disclosure? Do such requirements elicit
information that is important to investors?
    13. Would principles-based disclosure affect corporate compliance
and governance structures? If so, how?
2. Audience for Disclosure
    The Securities Act and the Exchange Act require registrants to
provide information prescribed by the Commission as necessary or
appropriate in the public interest or for the protection of
investors.\142\ The legislative history of the federal securities laws
speaks broadly to the ``buying public,'' \143\ without addressing
variation in the needs or sophistication of investors.
---------------------------------------------------------------------------

    \142\ See Section 7(a) of the Securities Act [15 U.S.C.
77g(a)(1)] and Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)].
    \143\ See H.R. Rep. No. 85, 73d Cong., 1st Sess. 4 (1933)
(broadly referring to the ``public,'' ``buying public'' or
``investing public'').
---------------------------------------------------------------------------

    Nearly fifty years ago, the Wheat Report recognized variation among
the investor audience for disclosure and suggested that the
Commission's disclosure requirements should strike a ``pragmatic
balance . . . between the needs of unsophisticated investors and those
of the knowledgeable student of finance.'' \144\ The Sommer Report also
recognized the broad spectrum of investors but recommended that the
Commission should not expect corporate filings ``to be readily
understandable in total by uninformed investors.'' \145\ Instead, the
Sommer Report concluded that the Commission's rules should ``emphasize
disclosure of information useful to reasonably knowledgeable investors
willing to make the effort needed to study the disclosures, leaving to
disseminators the development of simplified formats and summaries
usable by less experienced and less knowledgeable investors.'' \146\
---------------------------------------------------------------------------

    \144\ Wheat Report at 10.
    \145\ Sommer Report at D-9. See also A.A. Sommer Jr,. The U.S.
SEC Disclosure Study, 1 U. Pa. J. Int'l L. 145, 148 (1978) (``[T]he
Committee did not believe that the Commission should design a
variety of formats and degrees of summarization to serve the diverse
needs of various investors. It is evident that the sophistication
and knowledge of investors varies broadly, from the small,
occasional [investor] through the sophisticated portfolio managers.
The Committee believed that by having the Commission concentrate on
the needs of sophisticated investors, the needs of other types of
investors would be adequately served through the many private
services which collect, synthesize, summarize and comment upon data
concerning issuers.'').
    \146\ Sommer Report at D-9. The Advisory Committee on Corporate
Disclosure identified as information disseminators the
``organizations commonly thought of as the financial press,'' id. at
163, that ``condense, summarize and disseminate available
information and thereby assist analysts and investors in obtaining
investment decision making information in forms suitable to their
respective needs and abilities to use it.'' Id. at D-5.
---------------------------------------------------------------------------

    When adopting format and content changes to Form 10-K and the
annual report to security holders as part of integrated disclosure, the
Commission characterized users of Form 10-K as different from users of
the annual report to security holders.\147\ Specifically, the
Commission viewed annual reports to shareholders as readable documents
designed to be delivered to shareholders \148\ and stated that the
disclosure requirements in these reports ``evolved in the context of
shareholders making voting decisions.'' \149\ Meanwhile, the Commission
noted that Form 10-K was a more technical document,\150\ and the Form
10-K disclosure was developed for ``investors and other users making
economic decisions about the company.'' \151\ The Commission further
noted that the most frequent users of Form 10-K disclosure were
institutional investors, professional security analysts and
sophisticated individual investors.
---------------------------------------------------------------------------

    \147\ See Amendments to Annual Report Form, Related Forms,
Rules, Regulations and Guides; Integration of Securities Act
Disclosure Systems, Release No. 33-6231, (Sept. 2, 1980) [45 FR
63630 (Sept. 25, 1980)] (``1980 Form 10-K Adopting Release'').
    \148\ See Proposed Amendments to Annual Report Form; Integration
of Securities Acts Disclosure Systems, Release No. 33-6176 (Jan. 15,
1980) [45 FR 5972 (Jan. 24, 1980)] (``1980 Form 10-K Proposing
Release''). See also 1980 Form 10-K Adopting Release, citing Annual
Reports--Information Required in Proxy Statement, Release No. 34-
10591 (Jan. 10, 1974) [39 FR 3820 (Jan. 30, 1974)] for the statement
that ``[t]he annual report to security holders has long been
recognized as the most effective means of communication between
management and security holders. Such reports are readable because
they generally avoid legalistic and technical terminology and
present information in an understandable, and often innovative, form
. . . The Commission believes it is in the public interest that all
security holders be provided with meaningful information regarding
the business, management, operations and financial position of the
issuer and that the annual report to security holders is the most
suitable vehicle presently available for providing this
information.'' See also Annual Reports, Release No. 34-11079 (Oct.
31, 1974) [39 FR 40766 (Nov. 20, 1974)] at 40766.
    \149\ 1980 Form 10-K Adopting Release at 63630.
    \150\ See 1980 Form 10-K Proposing Release.
    \151\ 1980 Form 10-K Adopting Release at 63630.
---------------------------------------------------------------------------

    In the adopting release for these changes, the Commission stated
its belief that focusing primarily on these frequent users is
appropriate in formulating Form 10-K disclosure requirements, but
``such a focus would not be appropriate in formulating requirements for
annual reports to security holders.'' \152\ While the Commission
acknowledged the benefit of uniformity of certain minimum disclosures
in the annual report to security holders and the Form 10-K, it stated
that not all disclosure requirements would be identical between the
Form 10-K and the annual report to security holders, which potentially
served different purposes and user constituencies.
---------------------------------------------------------------------------

    \152\ Id.
---------------------------------------------------------------------------

a. Comments Received
    S-K Study. Two commenters noted that, in some contexts, customers,
vendors and competitors of registrants typically understand certain
disclosures, but that the same information is likely to be less
meaningful to investors who typically would lack the necessary
industry-specific knowledge and interest.\153\
---------------------------------------------------------------------------

    \153\ See Silicon Valley and M. Liles.
---------------------------------------------------------------------------

    Disclosure Effectiveness Initiative. Two commenters discussed the
profile of the investor contemplated by our disclosure requirements and
the intended audience for public company disclosures.\154\ Both
commenters recommended that we should assume that investors using
registrants' disclosures have some level of sophistication. One of
these commenters suggested that a contributing factor to increased
disclosure is the current assumption that the typical investor is a
novice.\155\ The other commenter

recommended an empirical study of the audience for financial statements
and a review of who makes investment decisions and how such decisions
are made.\156\ This commenter stated that sophisticated investors are
likely the most appropriate audience for Commission filings, as they
are generally the investors performing detailed analysis and acting as
price-makers. This commenter also stated that most of these investors
do not express concern about the volume of disclosure.
---------------------------------------------------------------------------

    \154\ See, e.g., CFA Institute; Shearman.
    \155\ See Shearman (stating ``it seems that disclosure if often
premised on the assumption that the reasonable investor has little
or no knowledge of a company's business, its industry or the merits
or risks associated with its business. We believe that the profile
of the reasonable investor has devolved to the `neophyte investor' .
. .'').
    \156\ See CFA Institute.
---------------------------------------------------------------------------

    One commenter suggested that current disclosure is too complicated
for the everyday person to read and that it should be less duplicative
and more straightforward.\157\ Another commenter noted the diversity of
the investor community and that the Commission's mandate is to protect
all investors.\158\ This commenter acknowledged that some disclosures
may not be useful to retail investors but may be useful to
institutional investors or vice versa and that in such circumstances,
disclosure should still be required. This commenter also stated that
each segment of the investor community is ``entitled to have access to
all necessary and relevant information.'' Additionally, this commenter
noted that broad based disclosure improves transparency and builds
public trust, confidence and understanding of capital markets.
---------------------------------------------------------------------------

    \157\ See letter from Carrie Devorah (Sept. 25, 2015).
    \158\ See letter from the American Federation of Labor and
Congress of Industrial Organizations (Nov. 20, 2015) (``AFL-CIO'').
---------------------------------------------------------------------------

b. Discussion
    We recognize the diverse composition and varied informational
needs, sophistication and financial resources of investors and that
some investors may obtain their analysis or advice from or through
third parties who use registrant disclosures. Investors using
registrant disclosure directly may include both individual investors
and institutional investors, such as banks, insurance companies, mutual
funds, exchange traded funds, pension funds, hedge funds and managed
accounts. These investor types may also use registrant disclosure
indirectly through professional data aggregators, financial advisors,
proxy advisors, professional analysts, journalists, and other third
parties who process and synthesize disclosures for end user investors.
    Different investor types and third parties may focus on different
filings or items of disclosure.\159\ Accordingly, the audience for
disclosure is an important consideration in determining the means for
disclosure, and specifically, in which filings or locations certain
information should be directly provided and where cross-references,
hyperlinks or incorporating by reference to information elsewhere is
appropriate.\160\
---------------------------------------------------------------------------

    \159\ See, e.g., 1980 Form 10-K Adopting Release. See also,
e.g., M. Drake, D. Roulstone, and J. Thornock, The Determinants and
Consequences of Information Acquisition via EDGAR, 32 Contemp. Acct.
Res. 1128, at 1128-1161 (2015) (documenting that, of the 9.8 million
users who directly searched the EDGAR database from 2008 to 2011,
86% are infrequent users accessing the database less than three
times a quarter and generally accessing only one filing, although
there is a small percentage of users accessing EDGAR at least every
other trading day).
    \160\ For a further discussion of cross-referencing,
incorporation by reference and hyperlinks, see Sections V.A., V.B.,
and V.C., respectively.
---------------------------------------------------------------------------

    Similarly, as different investors and third parties use disclosure
in different ways and seek varying degrees of information, the audience
for disclosure is also an important consideration in determining what
information is disclosed. Institutional investors, their financial
advisors and some third parties often use, and have supported requiring
complex information and interactive data.\161\ These types of investors
are likely to use disclosures of large numbers of registrants and
therefore, may be relatively more interested in standardized disclosure
formats well-suited for large-scale processing and analysis, including
machine-readable formats.
---------------------------------------------------------------------------

    \161\ See, e.g., CFA Institute, Financial Reporting Disclosures:
Investor Perspectives on Transparency, Trust, and Volume, July 2013,
(``CFA Report''), available at http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2013.n12.1; see also Interactive Data Release at
footnote 98.
---------------------------------------------------------------------------

    Other investors may seek disclosure that emphasizes, within the
universe of information that is disclosed, the information and analysis
that management believes is most important.\162\ To the extent some
investors rely on market prices to efficiently incorporate all public
information, rather than relying on disclosures directly, it could be
argued that disclosures should be tailored to those users most likely
to actively follow a registrant, transact in the registrant's
securities and set the market price.\163\ Investors in registrants that
do not have a public trading market for their securities, however, may
rely more directly on disclosure to evaluate their investments.
---------------------------------------------------------------------------

    \162\ For a discussion of tailoring disclosure to meet the
diverse or potentially competing needs of the investor audience, see
SectionV.F.
    \163\ The efficient market theory suggests that under certain
assumptions, most investors, when making investment decisions, could
rely on market prices to incorporate all available information.
According to this theory, most investors would not need to
individually examine much of the information in disclosures. See,
e.g., Stephen J. Choi, Company Registration: Towards a Status-Based
Antifraud Regime, 64 U. Chi. L. Rev. 567, 569-70 (1997); Eugene F.
Fama, Efficient Capital Markets: A Review of Theory and Empirical