SEC passes very important rules about board’s role in the oversight of risk

These paragraphs below, published by the Securities and Exchange Commission and effective February 28, 2010, may be the teeth risk management practitioners have been waiting for. Does it stand to reason that if Boards are required to provide disclosure about their risk management oversight process, they must have a risk management oversight process?

It reads on pages 43-44:

The final rules also require companies to describe the board’s role in the oversight of risk. We were persuaded by commenters who noted that risk oversight is a key competence of the board, and that additional disclosures would improve investor and shareholder understanding of the role of the board in the organization’s risk management practices.

Companies face a variety of risks, including credit risk, liquidity risk, and operational risk. As we noted in the Proposing Release, similar to disclosure about the leadership structure of a board, disclosure about the board’s involvement in the oversight of the risk management process should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.

This disclosure requirement gives companies the flexibility to describe how the board administers its risk oversight function, such as through the whole board, or through a separate risk committee or the audit committee, for example. Where relevant, companies may want to address whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a board committee or how the board or committee otherwise receives information from such individuals.

The final rules also require funds to provide disclosure about the board’s role in risk oversight. Funds face a number of risks, including investment risk, compliance, and valuation; and we agree with commenters who favored disclosure of board risk oversight by funds. As with corporate issuers, we believe that additional disclosures would improve investor understanding of the role of the board in the fund’s risk management practices. Furthermore, the disclosure should provide important information to investors about how a fund perceives the role of its board and the relationship between the board and its advisor in managing material risks facing the fund.

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