A Heightened Demand for Disclosures

The major regulatory reform law signed by President Obama last month will eventually require companies across industries to add a slew of new disclosures to their regulatory filings. Among the changes: companies will need to divulge new calculations comparing employees’ total compensation with that of the CEO, and say whether they allow employees to invest in financial instruments used for personal hedging purposes.

It’s up to the Securities and Exchange Commission to implement these new requirements. The changes will come on top of recent demands by the SEC for companies to bolster their proxy statements with data about executive compensation policies. Moreover, the new law suggests that other regulators, such as the Federal Reserve, will need to impose new disclosure rules on financial services firms.

In the meantime, Congress’s fall docket could include more discussion for requiring all types of companies to disclose even more data in their financial reports. The chart below lists current congressional proposals and pending mandates for SEC filings.

To be sure, passage of those proposals is uncertain, and depends on how much time lawmakers want to give the subjects in between campaign stumping, elections, and the presumably do-nothing, lame-duck session before the 111th Congress winds down for the year. However, the bills’ proponents are hopeful that if the proposals aren’t dealt with, they will quickly be readdressed in the next session.

For instance, a bill introduced by Rep. Ted Deutch (D-Fla.) in July concerning clarity surrounding businesses’ connections to Iran faces an uphill battle, since he’s been in Congress only four months. Plus, it comes just after a major bill related to Iran sanctions was signed by Obama.

Still, proponents of the legislation are optimistic it will gain traction and claim it could help CFOs keep track of their own (inadvertent) exposures to companies that have ties to Iran. “CFOs say they know they’re not doing business in Iran but don’t know how to tell if their suppliers or joint-venture partners are doing business there,” says Mark Dubowitz, executive director of the Foundation for Defense of Democracies, which is lobbying for more transparency by businesses on this issue. (In its reviews of annual and quarterly filings, the SEC regularly nudges companies for disclosures about any ties they have to countries considered to be state sponsors of terrorism, which are currently designated as Iran, Sudan, Syria, and Cuba.)
Also in circulation are bills that would require companies to share information about their indirect funding of political campaigns. While companies can’t give money directly to politicians, a February Supreme Court ruling lifted some restrictions, enabling them to fund the efforts of lobbyists who, for example, would use the money for campaign advertisements. One proposal would require companies to report to the SEC their spending on political activities on a quarterly basis. A similar bill looks unlikely to go anywhere after it failed to gain any support from Republicans.

Lawmakers are pushing for other changes in corporate disclosure in less formal ways than legislation. For example, just before the Senate took a month-long break earlier this month, Sen. Robert Menendez (D-N.J.) and five other Senate Democrats sent a letter to SEC chairman Mary Schapiro asking her to require companies to disclose all of their off-balance-sheet activities in their annual reports — not just those that that are “reasonably likely” to affect their financial condition, as currently required — and explain why those liabilities are not presented on the balance sheet.

Imposing new disclosure requirements on companies is one way lawmakers can indirectly change companies’ policies. “If they’re trying to shape a particular type of behavior when they can’t require a company to do something, they will require disclosures that are potentially embarrassing if the company doesn’t do what’s being asked,” says Gary Brown, a shareholder at law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, who counsels companies on SEC compliance and corporate governance issues.

For example, with the Dodd-Frank law’s provision requiring companies to state whether they prohibit or allow any employees to hedge their stock positions, Congress has basically “shaped behavior by negative disclosure,” Brown says. Rather than fessing up in their proxy statements that they allow employees to hedge, companies are likely to discontinue the practice instead.