The Securities and Exchange Commission's disclosure effectiveness initiative has, among other things, focused on the fact that risk factors in SEC disclosure documents have over the years become longer, often making it difficult for investors to identify those risks that are truly material to a company's business and prospects. But are long, generic risk factors here to stay? In a paper titled, "Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language," authors Richard A. Crazier, Jeff L. McMullin and John Spencer Treu suggest the answer may be yes. Standardized original boilerplate risk factors are less likely to be flagged as inadequate under judicial and regulatory review. The authors reviewed judicial decisions concerning motions to dismiss securities lawsuits alleging false or misleading forward-looking statements between 2005 and 2015 and consider the assessment of risk factor disclosures. As part of the second approach, the authors analyze SEC comment letters. There were very few SEC comments requesting removal of a generic or standardized risk. Standardized risk factor language is less likely to be targeted during the review process by the SEC. The disconnect between practitioners and the SEC advocating for more specific, descriptive and concise risk factors over lengthy, and generic risk disclosures appears to be at odds with judicial and regulatory behavior. This suggests that if behavior by registrants is to change, regulatory responses also have to change and be more consistent with the articulated guidance.
Originally published July 6, 2018
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