In this post we began a discussion about moving forward with our reporting after last year-end and identifying and planning for areas where we may need to adjust our on-going quarterly reporting for changes going on in the world around us and to also begin identifying areas where we may want to update, refine or improve our reporting.

We began this discussion with a review of a speech delivered at PLI’s 18^thAnnual Securities Regulation in Europe program on March 15, 2019, by CorpFin Division Director William Hinman.

In his speech Mr. Hinman discussed the principles-based foundations of the SEC’s disclosure system and how this requires us to use judgmentand think beyond just what the SEC’s rulesmay say or what we see other companies disclosing.

In his remarks Mr. Hinman said:

“The flexibility of our principles-based disclosure requirements should result in disclosure that keeps pace with emerging issues, like Brexit or sustainability matters, without the need to for the Commission to continuously add to or update the underlying disclosure rules as new issues arise.”

He also said:

  “our disclosure requirements are intended to provide investors with the material information they need about companies and their securities offerings to make informed investment and voting decisions”

With these reminders of our responsibility:

1. To monitor the world around us and identify issues that that may require changes in disclosure, and

2. To make judgments about materiality,

we can think about how they apply to Brexit and sustainability matters. While the SEC’s rules and regulations provide a starting point, we need to consider the whole context of a situation and include all information material to investors

 Both of these are areas we may want to place on our disclosure committee or disclosure process agendas.

Brexit Disclosures

Few issues in the economic world today create more uncertainty than Brexit.  Brexit will affect many companies and likely will have different effects company by company.  There is really no one-size-fits-all approach and likely no “industry” based disclosure that will meet the disclosure requirements for individual companies or individual industries.  In his remarks Mr. Hinman emphasized this with these words:

“Rather, investors 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. “

Sustainability Disclosures

Sustainability disclosures are an area where company management and investors are still exploring what they believe is material and what investors want to know about.  (And yes, there is a really interesting materiality discussion in that last sentence!). More and more companies are making significant sustainability disclosures.  For examples, you could review Etsy’s Form 10-Kand go back to our series of blog postson this topic. To help companies think about appropriate disclosures in this area Mr. Hinman said something very interesting about how he believed SEC rulemaking, if it had occurred, would have affected the “evolution” of these disclosures:

“The marketplace evolution of sustainability disclosures is ongoing – companies certainly provide more sustainability information than they did ten years ago – and allowing this evolution to continue should provide market participants with a continued opportunity to sort out the types of information they find useful. Had we leapt into action and issued prescriptive sustainability disclosure requirements when people first began calling for them, I believe we would have stymied that evolution and stifled efforts to develop useful disclosure frameworks. Substituting regulatory prescriptions for market-driven solutions, especially while those solutions are evolving, in my view, is something we need to manage with utmost care. In the meantime, we are watching carefully as market-led approaches develop in this area, and we actively compare the information companies voluntarily provide – typically outside of their SEC filings – with the disclosure we see filed with us.”

Clearly these comments put the onus on companies and investors in the disclosure marketplace to continue using judgment to determine the future direction of these disclosures.

A Concluding Thought – Board Oversight

Given the evolving and potentially material nature of these two disclosure areas it is not surprising that Mr. Hinman also discussed board oversight:

“To the extent a matter presents a material risk to a company’s business, the company’s disclosure should discuss the nature of the board’s role in overseeing the management of that risk. The Commission last noted this in the context of cybersecurity, when it stated that disclosure about a company’s risk management program and how the board engages with the company on cybersecurity risk management allows investors to better assess how the board is discharging its risk oversight function.”

This is also a great opportunity to begin updating and changing disclosures incrementally as we file each quarterly Form 10-Q with a view towards better disclosure in our next Form 10-K.  This kind of a gradual path of change from this year’s 10-K to each 10-Q to next year’s 10-K is generally far easier to manage organizationally than a big change all at once.  (This is particularly true with MD&A, and more about that later.)

As a last thought, these two areas are not the only ones that could require this kind of disclosure consideration.  Others could be the impact of Libor going away, the impact of tariffs, the risks surrounding evolving technology such as 5G cellular systems and a raft of things that we need to think about company by company and industry by industry.  And, as we approach our first quarter reporting, this is a great chance to review or reporting for areas where we need to use our judgment about evolving disclosures.

As always, your thoughts and comments are welcome!