On 15 March 2019, at the 18th Annual Institute on Securities Regulation in Europe in London, William Hinman, the Director of the SEC's Division of Corporation Finance, outlined best practices companies should consider when deciding what to disclose about complex and evolving risks, such as Brexit and sustainability.
Mr. Hinman emphasised that the SEC's disclosure rules generally favour a principles-based, rather than prescriptive, approach to topics that are complex, associated with uncertain risks and rapidly evolving. He reiterated that, when drafting risk factor disclosures, companies should focus on the most significant things that make an investment in a company and its securities subject to uncertainties or risk. Concise and focused disclosure explaining how each risk affects the company is most useful for investors. Companies should take care not to bury the reader in generic boilerplate or laundry lists of risks that might apply to any company. Mr. Hinman provided a framework that may be helpful to companies in making disclosure decisions about Brexit and other complex and uncertain risks:
[I]nvestors are better served by understanding the lens through which each company's management looks at its exposure. How does management assess and analyze Brexit-related risks and the potential impacts on the company and its operations? What is management doing to mitigate and manage these risks? What is the nature of the board's role in overseeing the management of these risks? Depending on the facts and circumstances of each company, the answers to these questions should provide material information to investors seeking to understand the risks attendant to Brexit for that company. One analytical tool to evaluate disclosure in this context is to consider how management discusses Brexit-related risks with its board of directors. Obviously not all discussions between management and the board are appropriate for disclosure in public filings, but there should not be material gaps between how the board is briefed and how shareholders are informed. For those of you involved in crafting disclosure documents, you can ask yourself a straightforward question: would these disclosures satisfy the curiosity of a thoughtful, deliberative board member considering the potential impact of Brexit on the company's business, operations and strategic plans?
Specifically, companies should consider whether Brexit exposes companies to material risks in the following areas:
- regulatory risk;
- supply chain risk;
- loss of customers, decrease in sales or increase in costs, due to tariffs or other factors;
- currency devaluation, foreign currency exchange rate risk or other market risk;
- contractual risk; and
- effect on financial statement recognition, measurement or disclosure items, such as inventory write-downs, long-lived asset impairments, collectability of receivables, assumptions underlying fair value measurements, foreign currency matters, hedge accounting or income taxes.
Director Hinman's full speech is available here.
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