Disclosure Categories
| Author | Stephanie Tsacoumis |
| Profession | Recognized securities law practitioner and professor at Georgetown Law Center |
| Pages | 77-235 |
77
Chapter4
Disclosure Categories
Disclosure Regime Generally
Principles- Based Versus Prescriptive Regulation
SEC disclosure regulations combine a principles- based approach with
prescriptive requirements, all generally embodied in Regulation S-K,
which governs nonnancial disclosure, and Regulation S-X, which
governs nancial disclosure. Many SEC rules require disclosure when
information is “material” to investors. These principles- based rules rely
on management to assess the signicance of the specied information
in light of the company’s overall business and nancial circumstances.
Disclosure of related- party transactions is one example of a principles-
based disclosure; public companies must disclose transactions “in
which a related person had or will have a direct or indirect material
interest.” As another example, one Regulation S-K provision requires
disclosure of “material commitments for capital expenditures.”
Principles-Based Disclosure
“Under a principles- based approach, one starts with laying out the key
objectives of good reporting in the subject area, and then provides guid-
ance explaining the objective and relating it to some common examples.”
—Robert Herz, Former Chairman, Federal
Accounting Standards Board
78 What Must Public Companies Disclose?
Other SEC rules contain objective, quantitative thresholds to
identify when disclosure is required. One Regulation S-K provi-
sion, for instance, calls for disclosure of environmental proceedings
involving a claim for damages or monetary sanctions in excess of
10% of current assets of the company.
Categories of Material Information
In developing and implementing its system of disclosure, the SEC
focused on identifying categories of material information. Because
Schedule A to the 33 Act identies certain categories of information
that generally are viewed as material to investors, the SEC incorpo-
rated and expanded these categories in Regulation S-K. These cat-
egories are now reected in the Regulation S-K specic line- item
requirements.
Business Operations
Consistent with Schedule A of the 33 Act, a key SEC disclosure
requirement addresses the character of the business done and
intended to be done by the company. Public companies have sig-
nicant exibility in presenting their business- related disclosure to
“showcase” their operations, provided that the disclosure is balanced
and fairly described.
Fair and Balanced Disclosure:
Customer Testimonials
Disclosure must be balanced: Glowing testimonials of prominent customers
may present an unbalanced view of the company, the results produced by
the company’s products, and the signicance of the customer. Such dis-
closure often implies that the testimonials represent typical customers and
typical results. In some instances, depending on the facts, staff may request
counterbalancing information, which may include negative feedback, as an
example.
Chapter4 ■ Disclosure Categories 79
(continued)
Disclosure must be fair: References to prominent customers also may create
misleading impressions about a company’s typical or representative cus-
tomer and about the size and quality of a company’s customer base. To put
customer testimonials into context, staff may ask for additional disclosure,
such as the total number of customers, whether sales to prominent cus-
tomers are signicant or immaterial, and whether the prominent customers
comprise a representative sample with respect to products and volume or
amounts of purchases.
Business Description
Regulation S-K calls for disclosure about the company’s business,
including a description of the general development of the busi-
ness during the prior ve years. The business done and intended
to be done by the company must be described in narrative form,
with a focus on the company’s “dominant segment or each report-
able segment.” The narrative should address the following spe-
cic items:
• principal or “material” products produced and services
rendered;
• new products or segments;
• sources and availability of raw materials;
• intellectual property;
• seasonality of the business;
• working capital practices;
• dependence on certain customers;
• dollar amount of backlog orders believed to be rm;
• business subject to renegotiation or termination of govern-
ment contracts;
• competitive conditions;
• compliance with environmental laws; and
• number of employees.
To continue reading
Request your trial