BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

US Securities and Corporate Governance

Form 10-Q

Main Content

Risk factor reminders for upcoming 10-Qs

As companies prepare upcoming periodic reports, they should focus on carefully reviewing and updating their risk factors. Some of the considerations may include:

  • COVID Risks. As a number of business sectors improve, it may be advisable to revise COVID-related risk factors to reflect the changing economic climate.  In some cases, the focus may need to shift to address challenges in increasing production, managing supply chains, hiring workers or otherwise responding to increasing customer demand.  In other cases, companies that benefited from dramatic changes in the economy during the pandemic peak may need to address potential risks associated with a return to normalcy.  For example, consider whether recent growth trends are viewed as sustainable in light of the MD&A requirement to discuss “known trends or uncertainties” that the company “reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income.”  At the same time, it may be appropriate to continue to caution investors as to uncertainties as to the future course of the pandemic – particularly as concern with the impact of variants evolves.
  • Labor Markets. Many sectors and regions are experiencing labor shortages. To the extent material, companies should consider disclosing in MD&A the effect of labor market conditions on their results of operations, and discussing possible future impacts in risk factors. 
  • Hypothetical Risks. Risk factors typically include a wide range of topics intended to warn investors of potential adverse events, most of which may not have not ever materialized. These are included

Climate-Related Disclosure in the Hot Seat

SEC Commissioners: Are Recent Announcements Changes from Status Quo or New PR Twist?

SEC Commissioners Hester M. Peirce and Elad L. Roisman today issued a statement providing their perspectives on the recent wave of climate-related announcements by the Divisions of Enforcement, Examinations and Corporation Finance.  Emphasizing that in their view the recent announcements raise more questions than they answer, the commissioners note their impact is not yet clear and query whether the announcements “represent a change from current Commission practices or a continuation of the status quo with a new public relations twist.”  Recent SEC ESG developments include:

  • On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement to, among other things, develop initiatives to proactively identify ESG-related misconduct.
  • On March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities, which include a greater focus on climate-related risks.
  • On March 2, 2021, Gary Gensler, President Biden’s nominee to serve as SEC Chair, noted in a Senate confirmation hearing that investors increasingly want to see climate risk disclosures. He indicated that, if confirmed, he would support the SEC’s focus on more climate-related disclosures.
  • On March 2, 2021, the House Committee on Energy & Commerce announced the Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act which, if adopted as proposed, would direct the SEC to adopt climate risk disclosure rules within two years.
  • On February 24, 2021, Allison Herren Lee,

SEC Simplifies MD&A and Related Financial Disclosure Requirements

In yet another 3-2 vote, on November 19, 2020, the SEC adopted significant amendments to MD&A and related financial disclosures in order to streamline disclosures and move to a more “principles-based approach.”  Among other things, the amendments:

  • Eliminate Item 301 (Selected Financial Data);
  • Simplify Item 302(a) (Quarterly Tabular Disclosure); and
  • Simplify Item 303 (MD&A)

We have prepared a client alert describing the amendments that can be found here.

Key issues for upcoming Q3 10-Q filings

As public companies prepare their Q3 releases and filings, some of the key issues they should consider include:

  • MD&A – as we reported last quarter, the SEC Staff issued COVID-19 guidance in June calling for companies to disclose the impact of the pandemic through the eyes of management, including, to the extent material:
    • The effects of the pandemic on a company’s operations, liquidity and capital resources; the short- and long-term impact of any federal relief received under the CARES Act; and the company’s ability to continue as a going concern
    • Operational changes as a result of the pandemic – from converting to telework to modifying supply chain and customer contracts, and now converting to the return to the workplace and business reopenings
    • Trends, events or uncertainties (such as possible events of default, breach of covenants, etc.), unless a company can conclude either that it is not reasonably likely that the trend, uncertainty or other event will occur, or that a material effect on the company’s liquidity, capital resources or results of operations is not reasonably likely to occur
  • Non-GAAP Financial Measures – as we recently noted, it appears few companies are jumping on the EBITDAC bandwagon; however, the SEC staff has issued comments on such measures that include adjustments for COVID-19, as in Comment 6 here. Accordingly, companies should be prepared to explain the quantification of any such adjustments and their rationale, consistent with the guidance described in our earlier

Updating U.S. Form 10-Q Risk Factors During the COVID-19 Pandemic – New Risks and Risks That Aren’t Just Hypothetical Anymore

As more companies prepare to file Form 10-Qs, they should give special attention to risk factors – particularly to consider whether new risks have emerged or hypothetical ones have become real.  The Form calls for disclosure of any material changes from risk factors included in the last 10-K.  However, the COVID-19 pandemic presents unique challenges to responding to other requirements as well, such as instructions to address “known trends and uncertainties” in MD&A or to provide “such further information . . . as may be necessary to make the required statements, in the light of the circumstances under which they were made not misleading” in Rule 12b-20.  Careful consideration of risk factors can help complete the picture for investors. Although companies need only disclose what is known or reasonably available, it can be challenging to comfortably determine what elements of the current state of affairs will, with hindsight, be viewed as both “known” and material to investors.

In order to prepare their disclosures, companies should

  • utilize appropriate disclosure controls and procedures, and seek input from relevant constituencies, including operating units, HR, IT, the law department and finance, to determine the scope and depth of impacts
  • if a designated individual or team is addressing the company’s COVID-response, be sure they are included
  • review each of the 10-K risk factors to evaluate which ones might need to be updated or supplemented or whether new ones should be added
  • confer with IR and senior management to assess the state of existing knowledge
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