Just last week, I blogged about drafting risk factor disclosure in a new AI-dominated era. A few days ago, SEC Chairman Paul Atkins delivered this speech – in addition to addressing several other topics – laying out a conceivable path towards risk factor reform. Here are the potential elements that he mentioned:
- What is the “primary purpose” of risk factors? It likely is one of these two possibilities:
– Convey what keeps managers up at night.
– Tool for establishing liability defenses, such as the “bespeaks caution” doctrine – or to qualify as “meaningful cautionary statements” under the statutory safe harbor for forward-looking statements. - Global set of risk factors for companies to draw upon: If the primary purpose is for management to communicate to investors, then a novel idea could be to have an entity – perhaps the SEC or the company itself – maintain a set of risks, which could be published separately outside of the annual report, that broadly apply to most companies across most industries.
For example, these could include impacts from legislative and regulatory developments, geopolitical issues and natural disasters. These risks would serve as a form of “general terms and conditions” associated with any investment in securities. A company could refer to these risks, rather than prepare its own, and supplement them as necessary. - Safe harbor from liability: If the primary purpose of risk factors is litigation defense, then reforms should go straight to the heart of the issue by potentially offering a safe harbor from liability. The SEC could adopt a rule stating that a failure to disclose impacts from publicized events that are reasonably likely to affect most companies will not constitute material omissions for purposes of some – or all – of the federal securities laws’ anti-fraud rules.
Such a safe harbor could incentivize companies to include fewer generic risk factors by shielding them from liability for events related to those generic risks. After all, if companies are not compelled to catalogue nearly every conceivable contingency to guard against hindsight litigation, then they can focus on risks that are more distinctive to their business.
Authored by
Broc Romanek