Environmental Disclosure:

SEC Should Explore Ways to Improve Tracking and Transparency of Information

GAO-04-808: Published: Jul 14, 2004. Publicly Released: Jul 15, 2004.

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To help investors make informed decisions, the Securities and Exchange Commission (SEC) enforces federal securities laws requiring companies to disclose all information that would be considered important or "material" to a reasonable investor, including information on environmental risks and liabilities, in reports filed with SEC. To monitor companies' disclosures, SEC reviews their filings and issues comment letters requesting revisions or additional information, if needed. This report addresses (1) key stakeholders' views on how well SEC has defined the requirements for environmental disclosure, (2) the extent to which companies are disclosing such information in their SEC filings, (3) the adequacy of SEC's efforts to monitor and enforce compliance with disclosure requirements, and (4) experts' suggestions for increasing and improving environmental disclosure.

Key stakeholders disagree about how well SEC has defined the disclosure requirements for environmental information. Some stakeholders who use companies' filings, such as investor organizations and researchers, maintained that the requirements allow too much flexibility and are too narrow in scope to capture important environmental information. Other stakeholders, primarily those who prepare or file reports with SEC, said that the scope of the current requirements and guidance is adequate and that companies need flexibility to accommodate their individual circumstances. Little is known about the extent to which companies are disclosing environmental information in their filings with SEC. Determining what companies should be disclosing is extremely challenging without access to company records, considering the flexibility in the disclosure requirements. Despite strong methodological limitations, some studies provide tentative insights about the amount of environmental information companies are disclosing and the variation in disclosure among companies. However, the problem in evaluating the adequacy of disclosure is that one cannot determine whether a low level of disclosure means that a company does not have existing or potential environmental liabilities, has determined that such liabilities are not material, or is not adequately complying with disclosure requirements. The adequacy of SEC's efforts to monitor and enforce compliance with environmental disclosure requirements cannot be determined without better information on the extent of environmental disclosure. In addition, SEC does not systematically track the issues raised in its reviews of companies' filings and thus, does not have the information it needs to analyze the frequency of problems involving environmental disclosure, compared with other types of disclosure problems; identify trends over time or within particular industries; or identify areas in which additional guidance may be warranted. Over the years, SEC and EPA have made sporadic efforts to coordinate on improving environmental disclosure; currently, EPA periodically shares limited information on specific, environment-related legal proceedings, such as those involving monetary sanctions. Using a Web-based survey of 30 experts that use disclosure information, including investor organizations and financial analysts among others, GAO obtained suggestions for increasing and improving environmental disclosure in three broad categories: modifying disclosure requirements and guidance, increasing oversight and enforcement, and adopting nonregulatory approaches to improving disclosure. Some of the experts offered comments about why particular proposals are unnecessary or unworkable. GAO also sought the views of representatives of companies that file reports with SEC, who questioned the value and feasibility of some suggestions.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As of December 2004, SEC began collecting closing memoranda on the results of its filing reviews in a searchable electronic database that has been to be a useful tool in evaluating how key issues are resolved across filings.

    Recommendation: To improve the tracking and transparency of information on environmental disclosure problems, the Chairman, SEC, should, as SEC develops its new procedures for closing memoranda following its reviews of company filings, take steps to ensure that key information from the memoranda is electronically tracked and organized in a way that would facilitate its analysis across multiple filings. Among other things, SEC should consider organizing the information so that agency officials can systematically determine the most frequently identified problem areas, analyze trends over time or within particular industries, and assess the need for additional guidance in certain areas.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: In June 2004, SEC issued a press release announcing that comment letters and company responses would be accessible through its Web site not less than 45 days after SEC staff has completed a filing review, beginning with August 2004 filings. In May 2005, after SEC modified its EDGAR data base to accommodate the new information on filing reviews, its Divisions of Corporation Finance and Investment Management began to release filing review correspondence.

    Recommendation: To improve the tracking and transparency of information on environmental disclosure problems, the Chairman, SEC, should explore the creation of a searchable database of SEC comment letters and company responses that would be accessible to the public.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: Beginning in October 2004, SEC and EPA initiated a series of meetings to discuss information sharing options. As of June 2005, SEC gained access to a non-public EPA information system that tracks enforcement proceedings. SEC and EPA are also exploring how EPA may be able to provide other relevant information in a useful format.

    Recommendation: The Chairman, SEC, should also work with the Administrator, EPA, to explore opportunities to take better advantage of EPA data that may be relevant to environmental disclosure and examine ways to improve its usefulness.

    Agency Affected: United States Securities and Exchange Commission


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