[House Report 113-642]
[From the U.S. Government Publishing Office]


113th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     113-642

======================================================================



 
        DISCLOSURE MODERNIZATION AND SIMPLIFICATION ACT OF 2014

                                _______
                                

December 2, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 4569]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4569) to require the Securities and Exchange 
Commission to make certain improvements to form 10-K and 
regulation S-K, and for other purposes, having considered the 
same, report favorably thereon with an amendment and recommend 
that the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Disclosure Modernization and 
Simplification Act of 2014''.

SEC. 2. SUMMARY PAGE FOR FORM 10-K.

  Not later than the end of the 180-day period beginning on the date of 
the enactment of this Act, the Securities and Exchange Commission shall 
issue regulations to permit issuers to submit a summary page on form 
10-K (17 C.F.R. 249.310), but only if each item on such summary page 
includes a cross-reference (by electronic link or otherwise) to the 
material contained in form 10-K to which such item relates.

SEC. 3. IMPROVEMENT OF REGULATION S-K.

  Not later than the end of the 180-day period beginning on the date of 
the enactment of this Act, the Securities and Exchange Commission shall 
take all such actions to revise regulation S-K (17 C.F.R. 229.10 et 
seq.)--
          (1) to further scale or eliminate requirements of regulation 
        S-K, in order to reduce the burden on emerging growth 
        companies, accelerated filers, smaller reporting companies, and 
        other smaller issuers, while still providing all material 
        information to investors;
          (2) to eliminate provisions of regulation S-K, required for 
        all issuers, that are duplicative, overlapping, outdated, or 
        unnecessary; and
          (3) for which the Commission determines that no further study 
        under section 4 is necessary to determine the efficacy of such 
        revisions to regulation S-K.

SEC. 4. STUDY ON MODERNIZATION AND SIMPLIFICATION OF REGULATION S-K.

  (a) Study.--The Securities and Exchange Commission shall carry out a 
study of the requirements contained in regulation S-K (17 C.F.R. 229.10 
et seq.). Such study shall--
          (1) determine how best to modernize and simplify such 
        requirements in a manner that reduces the costs and burdens on 
        issuers while still providing all material information;
          (2) 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
          (3) evaluate methods of information delivery and presentation 
        and explore methods for discouraging repetition and the 
        disclosure of immaterial information.
  (b) Consultation.--In conducting the study required under subsection 
(a), the Commission shall consult with the Investor Advisory Committee 
and the Advisory Committee on Small and Emerging Companies.
  (c) Report.--Not later than the end of the 360-day period beginning 
on the date of enactment of this Act, the Commission shall issue a 
report to the Congress containing--
          (1) all findings and determinations made in carrying out the 
        study required under subsection (a);
          (2) specific and detailed recommendations on modernizing and 
        simplifying the requirements in regulation S-K in a manner that 
        reduces the costs and burdens on companies while still 
        providing all material information; and
          (3) specific and detailed recommendations on ways to improve 
        the readability and navigability of disclosure documents and to 
        discourage repetition and the disclosure of immaterial 
        information.
  (d) Rulemaking.--Not later than the end of the 360-day period 
beginning on the date that the report is issued to the Congress under 
subsection (c), the Commission shall issue a proposed rule to implement 
the recommendations of the report issued under subsection (c).
  (e) Rule of Construction.--Revisions made to regulation S-K by the 
Commission under section 3 shall not be construed as satisfying the 
rulemaking requirements under this section.

                          PURPOSE AND SUMMARY

    In 1976, the Supreme Court's decision in TSC Industries, 
Inc. v. Northway, Inc. held that an omitted fact is material 
under the Federal securities laws if there is a substantial 
likelihood that a reasonable shareholder would consider it 
important in deciding how to vote his or her shares.\1\ 
Securities and Exchange Commission (SEC) Chair White, current 
Commissioners Gallagher and Piwowar, and former Commissioner 
Paredes have expressed their belief that investors are 
currently experiencing ``information overload'' and that the 
SEC needs to revamp its disclosure system. Ever-increasing 
amounts of disclosure make it difficult for investors to digest 
the information they receive and discern which information is 
most relevant. H.R. 4569 would direct the SEC to simplify its 
disclosure regime for issuers and investors by permitting 
issuers to submit a summary page on Form 10-K with appropriate 
cross-references to the content of the report. The legislation 
would also direct the SEC to revise Regulation S-K (Reg. S-K) 
within 180 days of enactment of the Act to more appropriately 
scale disclosure rules for emerging growth companies and 
smaller issuers, as well as to eliminate other duplicative, 
outdated, or unnecessary Reg. S-K disclosure rules for all 
issuers. Reg. S-K states the requirements for the content of 
the non-financial statement portions of registration statements 
filed under the Securities Act of 1933 and various filings 
under the Securities Exchange Act of 1934 (Exchange Act). In 
addition to these revisions, H.R. 4569 would direct the SEC to 
further study Reg. S-K and engage in rulemaking to implement 
additional reforms to simplify and modernize Reg. S-K 
disclosure rules within 360 days of enactment of the Act.
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    \1\TSC Industries, Inc v. Northway, Inc., 426 U.S. 438 (1976).
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                  BACKGROUND AND NEED FOR LEGISLATION

    Congress enacted the Federal securities laws following the 
stock market crash of 1929 primarily to ensure that 
``[c]ompanies publicly offering securities for investment 
dollars . . . tell the public the truth about their businesses, 
the securities they are selling, and the risks involved in 
investing.\2\ In addition to the basic disclosure requirements 
contained in the Securities Act and the Exchange Act, the SEC 
has exercised its rulemaking authority over time to impose 
additional disclosure requirements on companies when a stock is 
initially sold and then on a continuing and periodic basis. As 
SEC Commissioner Daniel Gallagher has stated, ``The SEC is 
first and foremost a disclosure agency.\3\
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    \2\ See ``The Investor's Advocate: How the SEC Protects Investors, 
Maintains Market Integrity, and Facilitates Capital Formation,'' 
available at http://www.sec.gov/about/whatwedo.shtml#.U8RbnkAoF-4.
    \3\ Commissioner Daniel M. Gallagher, Remarks at the 2nd Annual 
Institute for Corporate Counsel, Dec. 5, 2013 (``Gallagher Corporate 
Counsel Remarks'').
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SEC integrated disclosure system

    Prior to 1982, separate disclosure regimes applied to 
Securities Act registration statements and Exchange Act 
periodic reporting, which frequently resulted in overlapping 
and duplicative requirements. In 1977, the SEC's Advisory 
Committee on Corporate Disclosure issued a report recommending 
that the SEC adopt a single integrated disclosure system that 
would set forth all of the SEC's general disclosure rules and 
incorporate a single disclosure form. Shortly after this report 
was issued, the SEC adopted the first version of Reg. S-K which 
sets forth substantive disclosure requirements applicable to 
both public offerings and ongoing reporting requirements.
    In 1982, the SEC adopted the integrated disclosure system 
``to revise or eliminate overlapping or unnecessary disclosure 
and dissemination requirements wherever possible, thereby 
reducing burdens on registrants while at the same time ensuring 
that security-holders, investors and the marketplace have been 
provided with meaningful non-duplicative information upon which 
to base investment decisions.\4\ In adopting the integrated 
disclosure system, the SEC also expanded and reorganized Reg. 
S-K, making it the repository for the uniform, non-financial 
statement disclosures filed with the SEC under both the 
Securities Act and the Exchange Act. In addition to Reg. S-K, 
Regulation S-X (Reg S-X) provides guidance on the form and 
content of required financial statements and specifies the 
footnotes and schedules that should be included in or filed 
with the financial statements.\5\
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    \4\ SEC Report on Review of Disclosure Requirements in Regulation 
S-K, Dec. 2013, available at http://www.sec.gov/news/studies/2013/reg-
sk-disclosure-requirements-review.pdf.
    \5\ See id.
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    The Federal securities laws require publicly traded 
companies to disclose information on an ongoing basis. For 
example, U.S. public companies must submit to the SEC annual 
reports on Form 10-K, quarterly reports on Form 10-Q, and 
current reports on Form 8-K for a number of specified events 
and must comply with a variety of other disclosure 
requirements. The annual report on Form 10-K provides a 
comprehensive overview of the company's business and financial 
condition and includes audited financial statements. Although 
similarly named, the annual report on Form 10-K is distinct 
from the ``annual report to shareholders,'' which a company 
must send to its shareholders when it holds an annual meeting 
to elect directors. Because the typical 10-K filed by an issuer 
with the SEC is hundreds of pages long, investors often find it 
difficult to derive the important information about the 
company. Permitting issuers to submit a summary page would 
enable companies to disclose pertinent information in a 
streamlined fashion to investors without the fear of being 
sued. This document would also enable investors to more easily 
access the most relevant information about a company.
    H.R. 4569 builds on Section 108 of the Jumpstart Our 
Business Startups Act (JOBS Act) (P.L. 112-106), which directed 
the SEC to study Reg. S-K in order to simplify and modernize 
disclosure rules. The SEC completed this study and submitted 
its report to Congress in December 2013. The report includes 
recommendations for ``potential next steps, including an 
outline of economic principles to consider and preliminary 
conclusions that can be drawn from the staff's review of the 
disclosure requirements.\6\ The report fails, however, to 
include any substantive recommendations for reforming specific 
outdated, duplicative, unnecessary, or overly burdensome Reg. 
S-K disclosure requirements.
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    \6\ Id.
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    The SEC's outmoded corporate disclosure system diverts 
corporate resources toward regulatory compliance and away from 
innovation, growth, and job creation. Moreover, this antiquated 
disclosure regime leads to unnecessarily long, complicated, and 
often immaterial public company disclosures, resulting in 
investor confusion and potentially suboptimal investment 
decisions. As Chair White and her fellow Commissioners have 
recently recognized, the SEC's disclosure regime must be 
studied and revamped for the benefit of companies and 
investors.
    In an October 2013 speech, titled, ``The Path Forward on 
Disclosure,'' Chair White stated:

    Clearly, the topic of disclosure and a consideration of 
ways to make it better are perennial topics, as they should be. 
And, even though improvements have been made over the years, 
there is still more to consider and still, in my view, a lot 
more to do . . . . Although our study regarding Regulation S-K 
will only be the first step, it will set the stage for the 
dialogue and path forward toward a meaningful review of our 
disclosure requirements. . . . We must continuously consider 
whether information overload is occurring as rules proliferate 
and as we contemplate what should and should not be required to 
be disclosed going forward.\7\
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    \7\SEC Chair Mary Jo White, ``The Path Forward on Disclosure,'' 
Remarks before the National Association of Corporate Directors--
Leadership Conference 2013, October 13, 2013.

    Similarly, in a January 2014 speech, SEC Commissioner 
Michael Piwowar cited information overload in calling for a 
``top-to-bottom review of the Commission's disclosure 
regime.''\8\ In a January 2014 speech, Commissioner Gallagher 
also pointed to the dangers of information overload and called 
for revamping the SEC's corporate disclosure system. He stated, 
``Investors often say that disclosure documents are lengthy, 
turgid, and internally repetitive. Today's mandated disclosure 
documents are no longer efficient mechanisms for clearly 
conveying material information to investors, particularly 
ordinary, individual investors--myself included. . . . The 
complexity of today's disclosure requirements give [sic] the 
Commission cause for self-examination.''\9\ Commissioner 
Gallagher, however, indicated his preference for taking 
immediate, discrete steps to revamp clearly outdated or 
unnecessary SEC disclosure requirements, ``rather than risk 
spending years preparing an offensive so massive that it may 
never be launched.''
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    \8\Commissioner Michael S. Piwowar, ``Advancing and Defending the 
SEC's Core Mission,'' Remarks before the U.S. Chamber of Commerce, Jan. 
27, 2014 (``Piwowar Core Mission Remarks'').
    \9\Commissioner Daniel M. Gallagher, Remarks to the Forum for 
Corporate Directors, Jan. 24, 2014 (``Gallagher Corporate Directors 
Speech'').
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    H.R. 4569 will ensure that the SEC streamlines and 
simplifies disclosures, follows the Supreme Court's well-
established definition of materiality, and restores management 
discretion in identifying the material matters that should be 
disclosed to shareholders in periodic SEC filings.

                                HEARINGS

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises held a hearing on a discussion draft of 
H.R. 4569 on April 9, 2014.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
May 7, 2014, and again on May 22, 2014, and ordered H.R. 4569 
to be reported favorably to the House by a recorded vote of 59 
yeas to 0 nays (Record vote no. FC-62), a quorum being present.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto.
    1. A motion by Chairman Hensarling to report the bill, as 
amended, to the House with a favorable recommendation was 
agreed to by a record vote of 59 yeas and 0 nays (Record vote 
no. FC-62).


                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 4569 
will improve the usefulness and efficiency of SEC filings.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        COMMITTEE COST ESTIMATE

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, August 1, 2014.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4569, the 
Disclosure Modernization and Simplification Act of 2014.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Michael 
Hirsch and Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 4569--Disclosure Modernization and Simplification Act of 2014

    H.R. 4569 would require the Securities and Exchange 
Commission (SEC), within 180 days of enactment, to revise 
certain registration and disclosure requirements for securities 
issuers with an aim to reduce the burden on smaller companies 
and to remove any duplicative or unnecessary provisions. The 
SEC also would be required, within 360 days of enactment, to 
report to the Congress on ways to further simplify those 
regulations and, 360 days after that, to issue a proposed rule 
based on the findings of the report.
    Based on information from the SEC, CBO estimates that 
implementing H.R. 4569 would cost about $1 million over the 
2015-2019 period to comply with the reporting and rulemaking 
requirements under the bill. The SEC is currently studying and 
in the process of revising certain registration and disclosure 
requirements, so the costs of the initial rulemaking required 
under the bill would not be significant. Most of the costs 
would be incurred to issue the report and complete a second 
rulemaking process. Under current law the SEC is authorized to 
collect fees sufficient to offset its appropriation each year; 
therefore, we estimate that the net cost to the SEC would be 
negligible, assuming appropriation action consistent with that 
authority. Enacting H.R. 4569 would not affect direct spending 
or revenues; therefore, pay-as-you-go procedures do not apply.
    H.R. 4569 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    Assuming that the SEC increases fees to offset the cost of 
the second rulemaking that would be required by the bill, H.R. 
4569 would increase the cost of an existing mandate on private 
entities that are required to pay those fees. Based on 
information from the SEC, CBO estimates that the aggregate cost 
of the mandate would fall well below the annual threshold for 
private-sector mandates established in UMRA ($152 million in 
2014, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Michael Hirsch 
and Susan Willie (for federal costs) and Matthew Denneny and 
Patrice Gordon (for the private-sector impact). The estimate 
was approved by Theresa Gullo, Deputy Assistant Director for 
Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates reform 
Act.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    H.R. 4569 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    DUPLICATION OF FEDERAL PROGRAMS

    Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013), 
the Committee states that no provision of H.R. 4569 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013), 
the Committee states that H.R. 4569 requires the Securities and 
Exchange Commission (SEC) to issue regulations in accordance 
with the bill.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short Title

    This section states that the Act may be cited as the 
Disclosure Modernization and Simplification Act.

Section 2. Summary page for Form 10-K

    This section requires the SEC to issue regulations to 
permit users to submit a summary page on form 10-K under 
certain conditions.

Section 3. Improvement of Regulation S-K

    This section requires the SEC to revise Regulation S-K to 
reduce or eliminate burdensome requirements on emerging growth 
companies, accelerated filers, and smaller reporting companies, 
and other smaller issuers.

Section 4. Study on modernization and simplification of Regulation S-K

    This section directs the SEC to carry out a study of the 
requirements contained in Regulation S-K to improve its 
efficiency, and to report its findings to Congress, along with 
recommendations on how to improve efficiency, within 360 days 
of enactment.