SEC Division Of Corporation Finance Director Discusses Brexit And Sustainability Disclosures

On March 15, William Hinman, the Director of the SEC's Division of Corporation Finance, spoke at the 18th Annual Institute on Securities Regulation in Europe. He noted that the SEC's principles-based disclosure regime should result in disclosure that keeps pace with rapidly evolving, complex matters, including Brexit and sustainability issues. Although his remarks may have been influenced by the European audience, given the large number of international companies with listings in the US and domestic companies with European ties, the SEC staff should be expected to focus on the quality of disclosure with respect to these matters.

Brexit

In a recent survey of Brexit disclosures, the SEC found wide variability, ranging from generic statements (i.e., Brexit presents a risk, and the outcome is uncertain and may be material), which Mr. Hinman views as insufficient, to more detailed and thoughtful disclosures. Although encouraged by the increased number of companies including tailored Brexit disclosures in their 2018 annual reports, Mr. Hinman believes that room for improvement remains.

He expressed the view that given the substantial uncertainty associated with Brexit, it is likely that issuers have been preparing to address the risks from a range of outcomes. As a result, a company's disclosures should explain how management assesses its exposure to Brexit-related risks, their potential impact, how they are being managed, and the board's related oversight role.

The following are examples of the types of questions that companies should consider when crafting their Brexit disclosures, and that Mr. Hinman expects the staff will consider in its review:

Is the business exposed to new regulatory risk given potential changes in the laws and regulations that will apply to it and whether transition arrangements exist? Examples in this context include: risks associated with the potential loss of arrangements permitting UK financial institutions to provide services throughout the EU; relocation efforts; the potential impact of Brexit on the regulation of pharmaceutical products and clinical trials; potential route restrictions for airlines; and the administration of antitrust laws. Are there significant supply chain risks due to the potential loss of the UK's access to trade agreements with other nations and any resulting changes in tariffs on exports and imports? Would potential changes to customs administration relating to shipments between the UK and...