In response to the onset of the COVID-19 pandemic, many companies opted to include a risk factor addressing the pandemic in their 10-Qs for the first quarter of 2020. So, assuming that disclosure is still accurate and comprehensive, should you include it in your second quarter 10-Q? That’s the question addressed in a recent Bass Berry blog. Here’s an excerpt:
With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).
This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).
The blog goes on to acknowledge that although practice has not been uniform, there is a good argument based on the text of Form 10-Q that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs filed during the fiscal year. A Bryan Cave blog takes a similar position, noting that “strict compliance” with the language of Item 1A has become “common practice.”
These views are consistent with the position we’ve taken in our “Risk Factors Disclosure Handbook.” However, one of our members pointed out that the Sept. 2010 issue of The Corporate Counsel reported that, despite the language of Item 1A, the Staff had advised that new risk factor disclosure included in a 10-Q does not need to be repeated in subsequent 10-Qs. After making some inquiries, I learned that this advice was likely provided informally in a private conversation. Unfortunately, the Staff never formalized that guidance, and we don’t know whether the Staff would take the same position (or any position) today, in the context of COVID-19.
-John Jenkins, TheCorporateCounsel.net July 30, 2020
