On July 1, 2015, the SEC issued a release seeking public comment regarding possible revisions to public company audit committee disclosure requirements (“Concept Release”).¹ The potential revisions predominantly involve disclosures relating to an audit committee’s oversight of the independent auditor. In the Concept Release, the SEC calls into question whether its disclosure rules provide shareholders with sufficient information regarding the roles and responsibilities carried out by audit committees of public companies. Public issuers of securities that may be impacted by enhanced audit committee disclosure requirements include listed operating companies, closed-end funds (but not other registered investment companies) and certain other SEC registrants (“Issuers”).

Current Audit Committee Disclosure Requirements

Item 407 of Regulation S-K, which applies generally to Issuers, sets forth the disclosure requirements for audit committees. Such disclosure is only required in the proxy relating to an Issuer’s annual shareholders meeting where directors are elected.² Under the laws where most operating companies are incorporated, companies are required to hold annual shareholder meetings and approve directors at such meetings. The stock exchange rules or corporate governing documents typically require listed closed-end funds to also hold annual shareholder meetings. Currently, proxies sent to shareholders soliciting their vote to elect directors must include information about the audit committee charter, various actions taken by the audit committee in connection with the Issuer’s most recently audited financial statements, the name of each member of the audit committee and whether any of them have been designated as audit committee financial experts. In addition, Item 9(e)(5) of Schedule 14A requires an Issuer to describe the audit committee’s pre-approval policies and procedures in the proxy.³ Such audit committee disclosure requirements apply even if the shareholders are not approving the auditor.

Concept Release Regarding Possible Revisions to Audit Committee Disclosures

The SEC issued the Concept Release in response to four observations. First, there has been increased public discussion regarding the need for updates to audit committee reporting. Second, there is divergence in current audit committee reporting practices between issuers that voluntarily disclose more information than is required and those who do not. Third, the Public Accounting Oversight Board (“PCAOB”) has engaged in certain standard-setting initiatives could lead to additional information being disclosed regarding the auditor. Fourth, other jurisdictions have undertaken initiatives to enhance audit committee reporting, including the UK Financial Reporting Council, the International Auditing and Assurance Standards Board and the European Union.

The SEC seeks to determine whether changes should be made to the required disclosures about audit committees regarding the oversight of the audit and the auditor relationship. It desires to understand whether such additional information would help inform investment decisions and, where applicable, voting decisions regarding auditor ratification and the election of directors who are members of the audit committee.

With respect to the audit committee’s oversight of the auditor, the SEC seeks comments regarding whether issuers should be required to disclose information regarding communications between the audit committee and the auditor, the frequency with which the audit committee met with the auditor, review of and discussion about the auditor’s internal quality review and most recent PCAOB Inspection Report, and whether and how the audit committee assess, promotes and reinforces the auditor’s objectivity and professional skepticism.

In connection with the audit committee’s process for selecting the auditor, the SEC seeks comments regarding whether issuers should be required to disclose information regarding how the audit committee assessed the auditor, the process the audit committee undertook to seek any requests for proposals for the independent audit, and the Board of Directors’ policy for an annual shareholder vote on the selection of the auditor and the audit committee’s consideration of the voting results in its evaluation and selection of the audit firm.

It further has examined the audit committee’s process for selecting the auditor and seeks comments regarding whether issuers should be required to disclose information regarding certain members of the engagement team, audit committee input in selecting the engagement partner, the number of years the auditor has audited the company, other firms involved in the audit, and the location of the audit committee disclosures in SEC filings.

Lastly, the Concept Release poses several general questions regarding the disclosures as a whole, such as whether the disclosures should be voluntary and whether the disclosures would promote audit quality generally.

Impact of the Concept Release on Issuers

The potentially enhanced audit committee disclosure requirements would add even more disclosure to proxies about auditors and their interaction with the Issuers and their audit committees. Issuers generally elect a set or class of directors every year and prepare proxies in connection with such elections. In connection with the meetings, Issuers may have to make significantly more disclosure about their audit committee activities including possibly sensitive information about how auditors are selected and communications between the audit committees and their auditors. Shareholders electing directors consider a myriad of factors when voting on a given director. It remains to be seen whether the SEC ultimately concludes that more information about an Issuer’s audit committee, a single and arguably not a very important factor, will assist the shareholder on whether to vote to approve or disapprove a given director.

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¹ Possible Revisions to Audit Committee Disclosures, SEC Release No. 33-9862 (July 1, 2015).

² Closed-end funds are subject to slightly different audit committee disclosure rules in Regulation S-K. Open-end funds (mutual funds and exchange-traded funds) are not subject to such disclosure rules.

³ If the closed-end fund will also solicit shareholders for the approval of the auditor, it must provide additional information set forth in Item 9(e) of Schedule 14A, including information about the auditor candidate and the auditor being replaced.