For all of us with a December 31 fiscal year we are finally past the year-end finish line.  It is always nice to look up after year-end and feel good that we made it through another busy season.  Right after that celebration, however, the next thing we see is the challenge of first quarter-end!

This is an opportune moment to take stock of our just filed Form 10-K and think about ways we may want to update, refine or improve our reporting.  It is also a good idea to identify areas where we may need to adjust our on-going quarterly reporting for changes going on in the world around us.

At PLI’s 18thAnnual Securities Regulation in Europe program on March 15, 2019, CorpFin Division Director William Hinman provided us with discussion of two areasthat we can use as stepping off points for this process, Brexit and sustainability disclosures.

Beyond reminders about these two important areas, Mr. Hinman also included important discussion about how the SEC’s disclosure system works:

  1. The SEC’s disclosure system is fundamentally principles-based, and
  1. Two of the most important principles-based sections of the disclosure requirements are risk factors and MD&A.

While Mr. Hinman’s speech is fairly brief, it provides substantial food for thought.  We will explore this speech in two posts:

  1. A review of the principles behind the SEC’s disclosure system (this post), and
  1. A discussion of how these principles guide our disclosures in the two areas he addressed, Brexit and sustainability matters (next week).

These are two areas we may want to place on our disclosure committee or disclosure process agendas.

The SEC’s Principles-Based Disclosure System

One of the things that make Mr. Hinman’s speechwell worth reading is his discussion of the challenges in applying the principles-based disclosure guidance of the securities law to complex, uncertain and evolving risks.

One trap we sometimes fall into is the belief that if we disclose everything the SEC’s rules address, if we check all the boxes in Regulations S-K and S-X, the SAB’s and the SLB’s, and all the other sources from the SEC, we will be ok.  In our Workshops we emphasize that this is not the case! And losing this “check-the-box” mentality is crucial to get disclosure right in complex, uncertain and evolving areas.

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.”

While it may seem a bit contradictory, the SEC actually has a rule saying that we need to think beyond the rules!

240.12b-20   Additional information.

In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading.

To emphasize this part of the SEC’s disclosure regimen Mr. Hinman articulates the foundation of the disclosure system:

“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”

In other words, 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. He also provides this reminder about two of the most principles-based parts of periodic reports:

“Management’s Discussion and Analysis (MD&A) and Risk Factors are examples of such disclosure requirements and are well-suited to elicit disclosure about complex and evolving areas”

This is borne out in the very first sentence of Regulation S-K Item 303, the core guidance for MD&A:

229.303   (Item 303) Management’s discussion and analysis of financial condition and results of operations.

(a) Full fiscal years. Discuss registrant’s financial condition, changes in financial condition and results of operations.

It is hard to imagine a broader, more principles-based requirement than this simple sentence!

In our next post we will delve more into how this principles-based framework provides direction for the two specific areas Mr. Hinman addressed, Brexit and sustainability disclosures.

As always, your thoughts and comments are welcome!