This week, Broc Romanek launched CorporateAffairs.tv. No, it’s not a live video feed of boardroom dalliances. One of Broc’s first videos, Dramatic Risk Factors: We Face Competition (Vol. 1), inspired me to write about an idea that has been percolating in my cranium for some time.
As Broc so entertainingly points out, many risk factors, such as “we face competition”, can be found in nearly every risk factor section. This is true even though Item 503(c) of Regulation S-K clearly states: “Do not present risks that could apply to any issuer or any offering.” I doubt the SEC will be able to change this state of affairs because issuers see very little downside and some upside in including every hackneyed risk factor that has ever graced a disclosure document.
The situation is less than desirable for at least two reasons. First, it is profoundly inefficient. Thousands of companies are spending time and money to disclose essentially the same information. Second, it isn’t good disclosure. All of the boilerplate simply gets in the way of and obscures the disclosures that are unique.
Here’s my solution. The Securities and Exchange Commission should create a list of standard risk factors and issuers should be required to incorporate by reference all applicable risk factors into their filings. They would only be permitted to disclose risks that aren’t on the list. Thus, the SEC would create a standard risk factors such as “competition”, “dependence on key personnel”, and “natural disaster”. A further refinement would be to create a subset of industry-specific risk factors. For example, there could be additional risk factors for pharmaceutical companies, technology firms, et cetera. If necessary, an issuer would be permitted to supplement the standard risk factor with additional information. For example, a company might incorporate by reference the natural disaster risk factor and add “In addition, the registrant’s principal factory is located on an active earthquake fault in a flood zone that is routinely swept clean by hurricanes.” Another company might incorporate the dependence on key personnel by adding “The average age of our senior management is 94 and they all smoke.”
If this idea catches on, other disclosures might be similarly standardized.
Should the Ides of March be a Risk Factor?
Tomorrow is the Ides of March. The term refers to the Roman calendar system which was based on three dates in each month, known as the Kalends or Calends (think calendar), Nones and Ides. The Kalends always falls on the first of the month, the Nones, depending on the month, falls on either the fifth or seventh day, and the Ides is eight days after the Nones. Because the Nones falls on March 7, the Ides of March falls on March 15. In April, the Nones falls on the 5th and thus, the Ides of April is on the 13th.
March 15 is, of course, famous because it is the date on which Gaius Julius Caesar was murdered. According to the Greek historian Plutarch, a seer warned Julius Caesar of this day while Caesar was on his way to the Senate house:
ὥς τις αὐτῷ μάντις ἡμέρᾳ Μαρτίου μηνὸς, ἣν Εἰδοὺς Ῥωμαῖοι καλοῦσι, προείποι μέγαν φυλάττεσθαι κίνδυνον ἐλθούσης δὲ τῆς ἡμέρας προϊὼν (“A seer was telling Caesar on this day of the month of March, which is called the Ides by the Romans, a great danger was coming . . . “)
Fifteen centuries after Plutarch wrote these lines, William Shakespeare incorporated the seer’s warning into his play, Julius Caesar:
Soothsayer. Beware the ides of March.
Caesar. What man is that?
Brutus. A soothsayer bids you beware the ides of March.
The story, of course, ends with Caesar’s murder and a different kind of “March madness”.
It’s often said that Caesar met his end in the Roman Senate House. However, the Senate House was being renovated (on Caesar’s orders). Consequently, the Senate was meeting at the Theater of Pompey and that is where Caesar was slain.