SEC Move to Trim Corporate Risks Galvanizes Safe Harbor Debate

Companies and investors are at odds over the role legal safe harbors for risk factor reporting should play in the SEC’s push to lighten disclosure burdens.

One thing they agree on: how the agency handles them will be pivotal to whether companies feel comfortable cutting back on information they share with investors.

Sections of annual reports that detail companies’ business risks have ballooned, not because they’re useful to shareholders but because they curb opportunistic investor lawsuits, companies and industry groups recently told the Securities and Exchange Commission in comments calling for new safe harbors. Investors, on the other hand, said upholding robust disclosure marked the best path to accountability.

“Liability drives reliability,” the New York City Comptroller’s Office told the SEC. “Concealment generates litigation, while robust disclosure prevents it.”

Company and investor feedback could inform how the SEC approaches potential changes to a key disclosure rule, Regulation S-K. The SEC is weighing comments as it considers updating the regulation, which governs risk factors, executive compensation, and other reporting. The review is part of SEC Chairman Paul Atkins’ mission to entice companies to go public by cutting back the time and resources spent preparing reports.

Regulation S-K requirements were last updated in 2020 with new provisions requiring companies to include a summary of risk factor disclosure for investors if their section exceeds 15 pages. S&P 500 companies devoted on average nearly 14 pages to risk factors in 2024, up from just over 12 in 2020, according to a report from Deloitte and the University of Southern California’s Marshall School of Business.

Without changing the litigation landscape alongside reporting requirements, companies’ incentive to provide lengthy risk disclosures as a defense mechanism will remain, said University of Virginia assistant professor of commerce Jasmine Wang.

“This disclosure change and the litigation reform have to basically go hand-in-hand,” Wang said. “They really cannot be independent from each other.”

Safe Harbors

Companies said they over-disclose potential business risks due to fears that if stocks tumble, investors might sue citing companies’ failure to inform investors of a potential threat.

“In a way, risk factors are like a free insurance policy because if you told investors about a particular risk, if it comes to pass, they can’t then sue you and say that they didn’t know,” Debevoise & Plimpton LLP corporate partner Eric Juergens said.

Safe harbors, companies say, helps mitigate that issue.

The US Chamber of Commerce said the SEC should adopt a liability safe harbor for events that would reasonably affect most companies to reduce disclosure burdens. This could reduce the likelihood of investor lawsuits when geopolitical conflict or another large-scale event impacts performance.

But Norges Bank Investment Management argued when risks are common across industries—like global conflict or natural disasters—the most helpful information for investors is how specific companies are exposed and their contingency plans.

Regulation S-K should also include language codifying that risk factors are forward looking only, Nasdaq Inc. said. This could help curb investor litigation over previously stated risks that have materialized.

The SEC could add protections to clarify forward-looking risk factor disclosures reflect management’s opinion, so investors couldn’t win in court without proving management either didn’t believe such statements or omitted facts, law firm Jones Day suggested.

“This framework would mean that an issuer’s judgment about which risks warrant disclosure—including the decision not to identify a particular risk—would be evaluated as what it is: a subjective assessment of future uncertainties,” the Jones Day letter said.

But investor organizations pushed back on the notion that safe harbors are needed.

Organizations including As You Sow, Etica Funds, and the New York City Comptroller’s Officetold the SEC the preserving their ability to sue when necessary keeps the disclosure system reliable and accurate.

“Anti-fraud provisions are necessary to protect investors from false or misleading disclosures,” Etica Funds told the SEC. “Without adequate assurance of accuracy, our trust in the SEC system of disclosure would be greatly reduced.”

Less Repetition and Confusion

Businesses are confused about what specific disclosures are required under risk factors and need to cut through the noise, the Chamber said.

To do that, the SEC could let businesses highlight a smaller section of important risks or combine risks scattered throughout reports into one centralized narrative, it told the SEC.

Disclosures should focus on risks unique to a company, packaging manufacturer Greif Inc. told the SEC. That could be accomplished with new interpretive guidance from the agency or a page limit that would force companies to prioritize top issues, other company-side commenters said.

Companies also suggested allowing cross-referencing to cut down on repetition, nixing the requirement that companies provide a risk summary when the section exceeds 15 pages, and allowing notices on company websites to count as risk disclosure.

But the Massachusetts Public Retirement Investment Management Board, or MassPRIM, told the SEC costs increase when companies disclose detailed information in unregulated ways.

“When information is scattered across multiple forums, it is operationally difficult to assemble a complete picture of a company’s risk profile,” the pension manager said.

Companies should reach out to long-term investors to see what risk areas they’re watching and learn more about how they’re using corporate disclosures, MassPRIM said.

Other investors said companies aren’t always the best judges of what constitutes a risk.

Even if businesses don’t view material as relevant, it could be important for certain investors or become material over time, As You Sow said.

California pension fund CalPERS agreed with companies that boilerplate language driven by litigation fears doesn’t serve investors. But the investor said it also opposed a general risk repository—which Atkins floated this year—to replace company-specific disclosures.

Lengthy risk factor report sections doesn’t mean they’re irrelevant, the US Impact Investing Alliance said. Material risks facing companies have only expanded in recent years, and the solution for unwieldy disclosure is more specificity, not a tighter scope, it told the SEC.