In a first-quarter (for calendar year-end companies) SEC disclosure landscape dominated by COVID-19 considerations, almost all public companies included a new risk factor addressing COVID-19 in their first quarter Form 10-Q. Public companies are now considering potential risk factor disclosure in their Form 10-Q related to COVID-19 (see our prior blog post regarding first quarter COVID-19 risk factor disclosure considerations).
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).
While practice has not been uniform regarding whether public companies repeat risk factors included in a prior Form 10-Q in subsequent Form 10-Qs, there is a good argument based on the text of Form 10-Q as cited above 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 through the filing of the next Form 10-K (assuming that the risk remains applicable).
In the current environment, aside from the form-based rationale noted above, we believe that there are additional reasons as to why many public companies will want to include updated COVID-19 risk factor disclosure in their upcoming second-quarter Form 10-Q similar to the COVID-19 risk factor disclosure included in their first quarter Form 10-Q.
In this regard, the COVID-19 risk factor disclosure included in the first quarter Form 10-Q of many public companies included a significant amount of detail about risks associated with COVID-19, including both risks that the public company was experiencing at the time of the Form 10-Q filing as well as potential future risks. This risk factor disclosure often overlapped to a similar degree with disclosure regarding COVID-19 developments and trends included in the MD&A of the public company.
Given the passage of time since the filing of the first-quarter Form 10-Q, there will be developments that have occurred with respect to many public companies which will merit updates to both the MD&A disclosure in relation to COVID-19 trends and developments as well as updates to the prior COVID-19 risk factor disclosure in relation to ongoing COVID-19 risks (in this regard, corresponding revisions will often be made to both the MD&A and risk factor sections as the result of the overlap between these sections).
It is probable that many public companies will conclude that, in light of these updates, it is advisable from a disclosure perspective to include an updated COVID-19 risk factor in their second-quarter Form 10-Q.
In drafting this risk factor disclosure, public companies will want to be mindful of distinguishing between COVID-19 risks that have occurred versus COVID-19 risks that are potential risks but have not yet occurred – that is, public companies will not want to describe a risk as a potential or hypothetical risk if that risk has actually occurred (this has been the subject of SEC enforcement actions in recent years).
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