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Paul Zimmerman
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Corporate Risk Disclosures in the Wake of the 2020 Election

With the recent changing of the guard in Washington, D.C., and coinciding with annual reporting and proxy season, comes the need for public companies across industries to reassess their risk disclosures—whether included in their registration statements for selling securities or SEC periodic reporting requirements. 

Now that President Biden is in the White House, many policies set in place by the Trump administration are subject to change. This political reality triggers the need for businesses to rethink their risk factors and amend associated disclosures accordingly.

Doing so is critical for a couple of reasons: (1) the SEC mandates that companies appropriately educate their investors, and (2) up-to-date risk disclosures provide cover in the event an entity’s market value dips or shareholders sue alleging they were not warned about potential hazards.

Certain industry sectors—including energy (most notably, fossil fuel), pharmaceuticals, medical devices, technology, banking and finance, real estate, and cannabis, to name a few—are reacting to the new administration by reworking risk disclosures. This is in response to several disparate changes likely to occur under President Biden and a Democratic-controlled Congress that will surely impact business as usual. Some examples of policies and circumstances that may bear upon a company’s risk factors (depending upon the industry) include:

  • Biden’s focus on renewable power and the U.S. rejoining the Paris climate accord
  • Potential changes that may be made to the Affordable Care Act
  • The foreseeability of stricter regulations on drug pricing
  • The possibility of higher corporate taxes (which affects all industry sectors)
  • Fallout from the COVID-19 pandemic
  • Increasingly prevalent cybersecurity risks
  • More aggressive consumer protection enforcement
  • Steps to be taken to address climate change
  • A new approach to marijuana enforcement policy (and possible return to the Cole Memorandum that limits criminal charges related to cannabis)
  • Net neutrality rules and other laws governing Internet companies

Regarding potential changes to required climate change disclosures, Acting SEC Chair Allison Herren Lee announced this past week that the SEC is reviewing how companies have been complying with previous guidelines concerning disclosure of climate change risks. To date, companies have been required to disclose the material effects and costs of complying with federal, state and local environmental laws (which disclosure must be included in a company’s business description, management discussion and analysis section, as well as in its risk factor disclosures). The Acting SEC Chair stated the effects of climate change have become increasingly important to investors and, as such, the SEC intends to move swiftly in updating its climate-related disclosure guidelines and will likely expand the amount of information companies are required to disclose regarding risks that climate change poses to their business.

In addition, the SEC also enacted new risk factor rules last summer, requiring companies to present a summary of no more than two pages previewing their risks if the full risk factor section of their SEC filings exceeds 15 pages.

As a matter of practice, it is best for businesses to be as specific as possible in their risk factor disclosures, focusing on “material” risks as opposed to generalities that could apply to any public company. Of course, the Corporate & Securities attorneys at Michelman & Robinson, LLP stand ready to assist should you have any questions about your SEC filing obligations, risk disclosures included.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.