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June 25, 2019
SEC Securities Disclosure: Background and Policy Issues
Disclosure requirements are the cornerstone of federal
securities regulation. One of the key federal securities laws,
the Securities Act of 1933 (P.L. 73-22), is often referred to
as the truth in securities law. As this name suggests, the
1933 act focuses on disclosure, specifically requiring
companies offering securities, such as stocks or bonds, for
public sale to provide truthful information about these
securities and the risks associated with investing in them.
Similarly, the Securities Exchange Act of 1934 (P.L. 73-
291), requires companies with publicly traded securities to
periodically report certain information on an ongoing basis.
The disclosure-based regulatory philosophy is consistent
with Supreme Court Justice Louis Brandeis's famous quote,
sunlight is said to be the best of disinfectants; electric light
the most efficient policeman. In practice, transparency
through disclosure seeks to inform investors and
policymakers and enables market mechanisms to price risk
and deter fraud. This In Focus provides background on the
Securities and Exchange Commission's (SEC's) disclosure
regime and analyzes selected relevant policy issues.
Background
The SEC is the primary regulator overseeing the securities
markets, including enforcing securities disclosure
requirements. The SEC requires issuers offering and selling
securities to either register with the SEC and comply with
disclosure requirements (i.e., public offerings), or obtain an
exemption from certain registration requirements (i.e.,
private offerings). The SEC also requires issuers to make
certain nonpublic disclosures. For more details, see CRS
Report R4522 1, Capital Markets, Securities Offerings, and
Related Policy Issues, by Eva Su.
Public Disclosure
Public disclosures are publicly accessible through the
SEC's online portals. When companies fundraise through
public securities offerings, the SEC requires that the
companies disclose certain information, including financial
statements, business risks and prospects, a description of
the stock to be offered for sale, and the management team
and their compensation. Table 1 lists three types of forms
that the SEC requires publicly traded companies to file
periodically and as major events occur.
Table I. Examples of Public Company Disclosure
Form Content
10-K Annual reports of a company's business and financial
conditions and audited financial statements.
I0-Q Quarterly reports for the first three fiscal quarters of
the year that include a company's unaudited financial
statements and financial conditions.
8-K Current reports to announce major events
shareholders should know about.
Source: CRS.
Nonpublic SEC-Only Disclosure
The SEC also requires companies to make certain
nonpublic, SEC-only disclosures, which allow the SEC to
monitor risks and inform certain research, while keeping
the information confidential. The SEC normally does not
make nonpublic information identifiable to any particular
registrant, although it could release certain information in
the aggregate and use the information in enforcement
actions.
Principles of SEC Disclosure
Requirements
In remarks to the SEC Investor Advisory Committee on
February 6, 2019, SEC Chair Jay Clayton summarized five
principles in which he believes the SEC's disclosure
requirements must be rooted:
* Materiality-In 1976, the Supreme Court in TSC
Industries, Inc. v. Northway, Inc. defined information as
material if there is a substantial likelihood that a
reasonable shareholder would consider [the information]
important in deciding how to vote.
* Comparability-standardized financial reporting
requirements.
* Flexibility-the view that requirements that are too
rigid can lead to superfluous, and in some cases,
misleading disclosure.
* Efficiency-generally, finding the rule that is most
effective with the least cost.
* Responsibility (or liability)-the view that rules have
little long-term value if they cannot be effectively
enforced.
Materiality is one of the most important principles
governing public securities disclosure. In general, federal
securities laws require that issuers disclose to investors all
material information they need to make sound investment
decisions. Federal securities laws provide that investors
harmed by misleading statements or the omission of
material facts can seek a remedy through litigation. To be
effective, securities disclosures would neither be so
restrictive that they omit essential information, nor be so
voluminous that they create information overload or
exhaust resources with irrelevant information.
The concept of materiality has posed challenges for
regulators and companies, as it can be difficult to apply
consistent standards at the individual company level in
some circumstances. The SEC affords some discretion to
companies through a principles-based approach to
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