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March 21, 2019

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.


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 the remaining countries of the EU, including any resulting delays, materially impact a company's business, particularly if the business relies on just-in-time supply chains?
  • Does the company face a material risk of losing customers, a decrease in sales or revenues or an increase in costs due to tariffs or other factors? Is demand for the company's products especially sensitive to currency exchange rates or changes in tariffs? In such case, it may be appropriate to include estimates or ranges of quantitative changes, as well as qualitative disclosures.
  • Does the company have exposure to currency devaluation, an exchange rate risk or other market risk?
  • What is the company's exposure to contractual risk in the face of Brexit? Has the company undertaken a review of its existing contracts with counterparties in the UK and the remainder of the EU to determine whether renegotiation or termination is necessary?
  • Do Brexit-related issues affect financial statement recognition, measurement or disclosure items, such as inventory write-downs, long-lived asset impairments, collectability of receivables, assumptions underlying fair value measurements, foreign currency matters, hedge accounting, or income taxes?

He emphasized that this list is not intended to be exhaustive, and the materiality of Brexit-related disclosure will depend on a company's particular facts and circumstances.

Sustainability Disclosure

Mr. Hinman concluded his remarks with some more general comments concerning issuer disclosure on all emerging risk issues, including those related to environmental, social, governance, and sustainability matters (Sustainability Issues). Disclosure should provide insight as to how management plans to mitigate material risks related to Sustainability Issues, and how associated decisions could be material to the company's business and investors.

With respect to climate-related disclosures in particular, Mr. Hinman noted that the SEC's 2010 guidance remains relevant. For example, companies vulnerable to severe weather or climate-related events should consider disclosing material risks of, or consequences from, these events. Furthermore, if a company's facilities are exposed to extreme weather risks, and significant decisions related to relocation or insurance are being made, companies should provide disclosure when these matters are material.

Finally, with respect to a board's risk oversight role, Mr. Hinman noted that the SEC's recent guidance with respect to this topic in the context of cybersecurity may be useful in preparing disclosures about Sustainability Issues.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.