I want to commend Tim Leech for his passion, consistency, and his recent posts on LinkedIn.
His first post sets the stage for today’s discussion. He asked:
How did the world go so wrong interpreting what the term ‘risk management’ means?
I agree with most of his comments. Please read his first post before considering my following thoughts.
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First, let’s consider why the regulators (in particular, the US Securities and Exchange Commission) want ‘risk’ discussed in corporate disclosures. Tim traces it back to 2008 and the financial crisis, but it is older. If you are familiar with the regulations, I suggest skipping to the next section of this post.
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US Compliance Requirements
This is from a 2013 SEC Report on Review of Disclosure Requirements in Regulation S-K:
The requirement for disclosure of a summary of risk factors relating to an offering was first set forth in 1968 in Guide 6.251 Item 503(c) was added to Regulation S-K in 1982 as part of the adoption of the integrated disclosure system, combining the provisions of Guide 6 with the provisions of Guide 5 calling for disclosure of risks arising out of a lack of a trading market.
In 1995, this provision was amended to add a requirement that the risk factors section of a prospectus be captioned with the heading “Risk Factors” and that the…
