SEC Director Hinman Highlights the Utility of a Principles-Based Approach to Disclosure

Steven Lofchie Commentary by Steven Lofchie

SEC Division of Corporation Finance William Hinman emphasized the merits of a principles-based approach to disclosure.

In remarks at the 18th Annual PLI Directors' Institute of Corporate Governance, Mr. Hinman stated that the approach can be "highly effective" in eliciting disclosure in areas such as Brexit, the LIBOR transition, cybersecurity and climate change and noted its utility during the pandemic. Mr. Hinman stated that the advantage of a principles-based approach - such as that used with Regulation S-K amendments (see previous coverage here) - is that it recognizes companies as unique entities that operate in a wide variety of industries. Mr. Hinman explained that the amendments to modernize Regulation S-K allow companies to tailor their human capital disclosure "to [a company's] specific facts and circumstances, rather than specifying information that all companies must provide."

In discussing the SEC's public and private markets approach, Mr. Hinman noted that the SEC encouraged companies to go public by revising the financial disclosure requirements for guaranteed or collateralized debt offerings (see previous coverage here). He said that the SEC also moved to improve capital formation in the private market by amending the "accredited investor" definition (see previous coverage here) and harmonizing the exempt offering framework.

Further, Mr. Hinman suggested that companies practice "good corporate hygiene," referring to the way that a company ensures its representatives are avoiding trading when the market is not well informed, when designing insider trading policies and Rule 10b5-1 ("Trading 'on the Basis of' Material Nonpublic Information in Insider Trading Cases") plans.

Commentary

Director Hinman's advocacy for principles-based disclosure by issuers is consistent with the current majority view of the SEC Commissioners. (See, e.g., the stated positions of the Commissioners Clayton, Roisman and Peirce with the notable exception of Commissioner Lee. SEC Adopts Amendments to Public Company Reporting Requirements. See also SEC Commissioner Supports Expansion of the Use of Structured Data.)

Director Hinman announced his plans to leave the SEC. Assuming that the Democratic commissioners become a majority at the SEC, there may be a meaningful reversal of priorities, particularly in the Division of Corporate Finance, where it is possible that there will be requirements of significantly increased corporate disclosure in areas such as ESG, executive compensation, and political giving.

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