About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

LOG IN
LOG IN


1 1 (August 20, 2024)

handle is hein.crs/goveqkf0001 and id is 1 raw text is: Con gressionol Research Service Informing the IegisI9tive debate since 1914 Updated August 20, 2024 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 that 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 discusses the current disclosure regime and analyzes relevant policy issues. ackground The Securities and Exchange Commission (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 applicable 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 R45221, 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. 10-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 using information from the SEC. Nonpublic SEC-Only Disc osure 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 during enforcement. Prncples of SEC Disclosure Requirements A former SEC chair summarized several principles in which 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 remedy through litigation. The SEC affords some discretion to companies through a principles- based approach to materiality, which provides some flexibility for companies to make decisions on what to disclose on a case-by-case basis. Po 1cy Issues 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. Some observers characterize the central issue regarding securities disclosure as striking a balance between requiring disclosure that is consistently material and/or useful on the