A (vaguely) scary world at Wells Fargo…

October 5, 2011

When it comes to disclosing the risks that shareholders face, companies seem to believe that vaguer and blander is better. So let’s hear it for the brave souls at the Securities and Exchange Commission who decided to call a company out for just such an approach.

And really, what better company to dope-slap for the practice than Wells Fargo (WFC)?

The big bank was reprimanded in a letter from the SEC staff on May 11 — but just released last week — for issuing risk-factor disclosures “too vague to be meaningful to investors.” The examples offered by the staff:

—Our financial results and condition may be adversely affected by difficult and business economic conditions… Financial and credit markets may experience a disruption… Higher charge-offs and worsening credit conditions could require us to increase our allowance … Our ability to grow revenue and earnings will suffer if we are unable to sell more products to customers.

To all of which, no doubt, even the least sophisticated bank investor would probably say, “Duh.” Why not add that the Wachovia acquisition could hurt Wells Fargo if it doesn’t go as planned? Or that interest-rate changes could hurt interest income? Or that the company’s risk-management processes might not successfully manage risk? Or that bank customers might withdraw their money and put it to work elsewhere?

Oh, wait. They did. Really. Here’s how that last one was phrased:

“Our bank customers could take their money out of the bank and put it in alternative investments, causing us to lose a lower cost source of funding.”

Do tell.

Of course, if you’ve spent any time looking at SEC filings, or even just reading this blog, you know filings are often models of opacity and circumlocution. For all their bland vagueness, this kind of inanity is pretty much par for the course.

No wonder, then, that Wells Fargo actually tries to defend itself in its response to the SEC:

“We believe that our risk factors disclosure … appropriately described the most significant risk factors facing the Company as required…”

Still, the bank was good enough to revise its disclosures anyway (the changes show up in Exhibit A to Wells Fargo’s initial May 25, 2011, response to the SEC — scroll about two-thirds of the way down).

There are indeed some substantive revisions, though some of the changes strike us as little more than reshuffling some words. One heading, for example, was changed from “Risks relating to current economic and market conditions” to “Risks relating to economic and market conditions and regulatory activity.” That should make all the difference, no?

The risk-factor business actually made up a small part of the three-month exchange of correspondence — all told, the bank’s side of the correspondence alone worked out to more than 30,000 words, including the revised disclosures — and the SEC staff got into some considerably more substantive issues, including fluctuations in net gains from trading, first- and second-lien issues in its residential housing portfolios and a host of related issues.

But when it comes to individual investors, risk factors matter. They should be informative.

And here’s the other thing about risk factors: They’re not supposed to be generic. Not that you would know this by just looking at filings, of course. As we’ve footnoted before, it’s not uncommon for companies to warn about acts of God, social media, even spam — in other words, everything short of the risk that the continued expansion of the universe will leave it an empty, icy void bereft of sentient beings with a demand for widgets.

Here’s guidance from the Securities and Exchange Commission more than a decade ago, under the now-all-but-forgotten plain-English initiative (emphasis and link are ours):

“Amended Item 503(c) of Regulation S-K specifies that issuers should not present risks that could apply to any issuer or any offering. Further, the subheadings must adequately describe the risk that follows. Item 503(c) seems to be the least understood of the plain English requirements. We have provided sample risk factor disclosures and subheadings to help preparers comply with Rule 421(d) of Regulation C and Item 503(c) of Regulation S-K.”

The examples in that document are marvels of clarity and directness, at least by the standards of the logorrhea we generally encounter in the filings.

Too bad Wells Fargo, like so many other companies, never took the message to heart.

Image source: hotblack via morguefile.com

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