August 25, 2020

SV Risk Factor Disclosure Trends: Potential Impact of Proposed Rulemaking

Wilson Sonsini recently came out with its risk factor trends report among Silicon Valley’s 150 largest public companies.  One item the report delves into is the potential impact of SEC proposed rulemaking relating to risk factors that the Commission is slated to consider at its meeting tomorrow. Some may recall that the proposed amendments to Item 105 of Reg S-K would require summary risk factor disclosure if the risk factor section is greater than 15 pages and that companies organize risk factors with headings.

Wilson Sonsini’s report covers risk factor disclosures from Form 10-Ks filed from early 2019 through March 2020 and includes information of disclosure practices overall of the SV150.  Given the timing of the disclosures that were reviewed, the report doesn’t indicate trends in Covid-19 risk factor disclosure but it does illustrate how Covid-19 related disclosures impacted the overall length of risk factor disclosures. Here’s an excerpt:

Wilson Sonsini’s report says that 74% of SV150 companies include at least one heading for risk factors, with most including only one to three headings.  And, all companies that went public in the last five years include at least one heading in their risk factors – whereas companies that went public over 20 years ago only 39% include at least one heading in their risk factors.

As far as inclusion of summary risk factor disclosure, the report says none of the SV150 companies include an explicit summary risk factor disclosure in their 10-K filings.  So although this practice is rare, the report references Walmart’s Form 10-K filed in March of this year as a notable example of a titled summary risk factor disclosure (see page 5).

Other trends noted in the report include the number of pages of risk factors decreases as more time elapses since a company’s IPO – companies that went public in the last five years average about 27 pages of risk factors compared to companies that went public at least 20 years ago that average about 15 pages of risk factors.

As annual sales increase, the average total number of pages of risk factors also decreases.

Companies in the technology industry average the highest total number of pages of risk factors disclosure – approximately 23 pages.

Mandatory D&O Insurer Rotation: Solution for Mitigating Governance Risks?

That’s what one law prof suggests.  A recent entry on the Columbia Law School Blog asserts that mandatory rotation of D&O insurers could help control corporate governance risks.  Professor Andrew Verstein of UCLA School of Law grounds that assertion on his 66-page academic study in which he concludes that mandatory rotation of D&O insurers would leave insurers with only a few years to recoup any losses thus leading the insurers to serve as governance gatekeepers to limit those losses.

Like many academic studies, the study is thought-provoking as the author suggests D&O insurance itself contributes to governance problems and that the way D&O insurance is bought and sold harms governance.  The gist of the author’s argument in favor of mandatory rotation is based on a theory that companies rarely switch D&O insurers, leading insurers to be passive and not monitor risk because they can recoup losses over future years from their loyal customers.  By time-limiting the client-insurer relationship, the author says insurers would need to evaluate and price risks in real time rather than recouping any losses for years into the future. Here’s an excerpt summarizing the author’s reasoning:

Insurers should be permitted no more than five years with a given client, at which time they must take their underwriting elsewhere. Mandatory rotation renders the passive insurance model impractical. Insurers can never hope to insure passively and then recoup their losses down the line. Every insurer will have to actively vet insureds for risks pending over the next few years, to monitor for abrupt changes during that period, and to take steps to limit a corporation’s slide toward increase risk; the result is that corporations and their managers will be more likely to internalize the expected cost of their harmful behaviors and, thus, take those harms more seriously.

Through 66 pages, the author acknowledges the complexity of the D&O insurance model.  For a thorough critique of the study, Kevin LaCroix walks through a thoughtful series of observations about the author’s assumptions – and reasons for disagreement.  Up front, Kevin notes D&O insurers and their policyholders would be surprised to hear of the perceived loyalty between companies and their insurers since the D&O insurance environment can at times be “prickly.”  Among other things, Kevin also discusses how much chaos mandatory rotation of D&O insurers would cause.

Without getting into the weeds about the author’s assertion and assumptions, some might wonder how mandatory D&O insurer rotation would be enforced and one way the author suggests is for the SEC to require it.  As the author notes, this would require Congressional action because there is no colorable basis for the SEC to impose such a requirement on companies – I don’t think I’m going too far out on a limb in saying it’s unlikely this is coming along anytime soon.

SRCs: Scaled Disclosures & Tools to Help Determine Filer Status

With recent economic volatility, some companies might find themselves evaluating whether they qualify as “smaller reporting companies.”  Of course, companies qualifying as “smaller reporting companies” can take advantage of scaled disclosure requirements that are outlined in this BDO memo – it provides a quick summary for those able to take advantage of SRC filing status.  For more on determining filer status, which can be confusing, check out our “Disclosure Deadlines Handbook” and our “Smaller Reporting Companies – Entering Status” and “Smaller Reporting Companies – Existing Status” checklists available to members on

– Lynn Jokela