March 10, 2023

Disclosure Controls: Lessons From Recent SEC Enforcement Actions

Last month, Liz blogged about the SEC’s recent enforcement action against Activision-Blizzard, which is the latest action premised solely on an issuer’s alleged deficient disclosure controls unaccompanied by a related disclosure violation. This Shearman memo┬áreviews that proceeding and another recent SEC action premised solely on deficient controls and offers up some lessons that public companies should draw from those enforcement actions. This excerpt says that companies should look at the relationship between disclosure controls and the disclosures contained in their SEC filings as a two-way street:

Treat the relationship between disclosure controls and disclosure content as an open feedback loop rather than as a one-way communication channel. Disclosure controls are often viewed as informing disclosure content, but not the other way around. Consider reviewing your existing disclosure content with an eye towards identifying key topics and risks and then compare those to your disclosure processes.

Is each of these topics and risks covered by a corresponding stakeholder on your disclosure committee? Are disclosure committee members collecting information relevant to assessment of these topics and risks? What information are you collecting from business unit leaders who are not directly represented on the disclosure committee, and what procedures do you have in place to ensure that relevant information is fed into the disclosure process? Allowing feedback from disclosure content to disclosure controls also means being mindful of the disclosure controls implications when adding new risk factors.

The memo disagrees with contentions that the Activision-Blizzard proceeding will require companies to collect all information that could potentially be relevant to disclosures about an operational risk once it decides that the risk merits a reference in the risk factors section of its filings. Instead, the authors expect that the SEC will pursue these purely disclosure controls related proceedings selectively, “in matters (1) of broader public interest, or (2) where the SEC sees a specific opportunity to highlight an example of information it believes is getting insufficient attention for disclosure purposes.”

John Jenkins