The Impact of Brexit on the SEC Disclosure Regime
The SEC Disclosure Regime is at the core of the mission to protect investors, maintain orderly markets and ensure efficient access to capital. Brexit impact on SEC Disclosure Regime was under the spotlight recently, adding one more stream of consequences to the withdrawal of the United Kingdom from Europe, whose complex implications for issuers’ operations will have to be accurately described to US investors.
In this brief post we highlight some of key takeaway points of the speech given by the Director of the SEC Corporate Governance Division in March 2019 in London, which touched on the Brexit impact on SEC Disclosure Regime.
Please find a link to the speech here.
Brexit is here already
The US regulatory perspective on Brexit, though in first instance might appear not to be the most relevant, is instead important to all foreign issuers (UK or EU domiciled) as well as US issuers with operations in the UK and seeking access to capital in the United States. In as much as the magnitude of Brexit keeps unveiling itself each day and the consequences of the withdrawal cannot all be foreseen, the expectation from the US regulator is that the majority of these international issuers have or should have already been able to ascertain the impact that Brexit has on their business and be able to disclose it to investors.
In other words, Brexit impact on SEC Disclosure regime translates into more robust disclosures to investors of the risks inherent to the business of a specific issuer in light of Brexit. Notwithstanding the fact that formally Brexit might have been postponed to the end of October 2019, for all these international issuers it is here already and a wait and see approach – as the director of the SEC Corporate Finance Division choose to define it – is not realistic nor acceptable for investors and overall stability of markets.
Of course, the importance of disclosure lies in that it provides investors with the information they require in order not only to make decisions on investments but also on exercise of their voting rights. The reputation of efficiency, evolution and low costs of capital that US capital markets have acquired over time, an example that Europe has been trying to replicate with the Capital Markets Union (please read more about the Capital Markets Union here ), justifies the need for robust disclosure in order to maintain investor confidence and consequently low cost for capital.
Emphasis on Materiality of Disclosure regime
The speech of the Director of the SEC Corporate Finance division gives an opportunity to highlight some of the do’s and don’ts in terms of disclosure, by defining appropriate investor disclosure both in the negative and in the positive. Disclosure should not be generic, boiler plate or laundry list style and, most importantly, should resonate and apply to the situation of the specific company. [Disclosure] should allow investors to understand how a company will position itself as a business and its operations towards the uncertainty of evolving complexes situations, like Brexit.
Disclosure should be concise and focused on explaining how the risk will impact the company and its operations, giving investors the ability to make a decision on the basis of the positioning of the company in the face of those risks. Especially when facing evolving situations like Brexit, disclosure should retain a dynamic approach and should be updated when necessary in order to keep investors abreast with contingency and sustainability approaches adopted.
Advising clients as a general rule
The analysis carried out by the Corporate Finance division at the SEC on Brexit impact on SEC Disclosure regime is also important for another reason. In fact, it shows that appropriate disclosure is not a compartmentalised exercise. Appropriate disclosure doesn’t live in a vacuum but is part to a more encompassing effort that companies should make in advising their investors about the complexities of situations and risks faced by their businesses and how they position themselves in the face of the ensuing challenges. The advice should be dynamic – and the disclosure alike – to cater for the ever-changing landscape of markets in the context of Brexit, in this instance.
Even though those are principles from a US regulatory perspective and apply to issuers raising capital in the US, we cannot see how the same approach should not be adopted in Europe as well. This is especially true when the Capital Markets Union takes the US capital markets as an example of how capital markets should operate in Europe too.
We have seen Brexit related disclosure appearing in prospectuses and offering memorandum across Europe, also for investment funds structures, however sometimes not immune from the same criticism we have seen above of the boiler plate and laundry list approach, lacking sometimes relevance to the situation of the operations of the specific fund. Fund managers should take inventory of the implications that Brexit, whether hard or not or in whatever shape and form it will be adopted, will have on their businesses and be able to advice their investors accordingly in their offering documents.