Speaking in connection with the Practising Law Institute’s (PLI) Directors’ Institute on Corporate Governance, Securities and Exchange Commission Division of Corporation Finance Director, William Hinman, shared his views on a principles-based approach to disclosure requirements and to rulemaking. His remarks, which when read along with those of Chair Jay Clayton at the Economic Club and with Chair Clayton’s testimony to the Senate, provide a summation of the work of the SEC during the last few years.
Perhaps in anticipation of greater expected focus in the years to come on climate change disclosures, human capital disclosures and other ESG-related topics, Director Hinman noted that, the SEC’s “disclosure requirements emphasize materiality and are intended to provide investors with the information they need to make informed investment and voting decisions.” While noting that there are certain line item or prescriptive requirements, Director Hinman emphasized that generally, the principles-based requirements allow a registrant to tailor disclosures to their specific circumstances. Hinman pointed to disclosures related to the pandemic as an example of this principles-based system at work. Moving on to rulemaking, Director Hinman noted that the same approach underlies the approach of the SEC in recent rulemakings, including those that amend the disclosure requirements in Regulation S-X relating to business, legal proceedings and risk factors. He focused on the requirement relating to human capital disclosures, which allows companies to take an individual approach in response to the requirement and provide appropriate, tailored disclosures.
Director Hinman also discussed the rulemaking undertaken in recent years designed to make the public markets more attractive to companies. As examples, he pointed to the extension of the test the waters accommodation to all issuers, and the revisions to the financial disclosure requirements for guaranteed or collateralized debt offerings. Echoing similar statements made by Chair Clayton in his Senate testimony, Director Hinman noted that going public and public company status may not be an objective for every issuer. As a result, the SEC has undertaken amendments to the exempt offering framework and to the definition of accredited investor.
Already addressing critics, Director Hinman notes that, “The Division’s principles-based approach to rulemaking attempts to improve the securities markets overall, not just the public markets or the private markets. Some of our rulemakings better facilitate companies going public, but these are not undertaken at the expense of the private markets. Nor do rulemakings that improve the private markets mean that the public markets will suffer. Creating, maintaining and improving upon a system where all types of companies can raise capital efficiently and investors are properly protected is beneficial to everyone.”
Director Hinman also touched on importance of good, tailored disclosure that is vetted by accounting, legal and financial “gatekeepers.” Hinman further noted that, “A healthy perspective is to view corporate disclosure as an opportunity to engage and build trust with shareholders, as opposed to an obligation or requirement to be minimized. Disclosures that are transparent, accurate, balanced and fair can build shareholder loyalty and serve long-term company interests. Good things can happen when companies strive to meet the meaning and intent, not just the letter, of the law.”
He concluded with remarks on corporate hygiene, including the design and operation of insider trading plans, Rule 10b5-1 plans, and option grants. See the full text here.