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Risk Factors Practical Guidance® Market Trends 2020/21: Risk Factors A Practical Guidance® Practice Note by Christina Thomas and Candace Jackson, Mayer Brown LLP Filings Requiring Risk Factor Disclosure Risk factor disclosure appears in SEC filings where the form Christina Thomas being filed requires a risk factor section compliant with Item Mayer Brown LLP 105 of Regulation S-K, such as annual reports on Form 10-K, quarterly reports on Form 10-Q, and registration This practice note focuses on recent market trends in risk statements under the Securities Act of 1933 and the factor disclosure required in U.S. Securities and Exchange Securities Exchange Act of 1934. Commission (SEC) filings and provides recent risk factor disclosure examples, covering COVID-19, Brexit, London For additional guidance on Form 10-K and Form 10-Q, see Interbank Offered Rate (LIBOR) cessation, cybersecurity, Form 10-K Drafting and Review, Form 10-Q Drafting and and China-based issuers. Additionally, this practice note Review, Form 10-K Form Check: Checklist, and Form 10-Q discusses recent amendments to the description of the risk Form Check: Checklist. factor disclosure requirement, and how the amendments to the rule may affect risk factor disclosure going forward. Location of the Disclosure For additional practical guidance on risk factors, see Top Item 105(b) of Regulation S-K dictates that in a registration 10 Practice Tips: Risk Factors and Risk Factor Drafting for statement, risk factor disclosure must appear immediately a Registration Statement. For other market trends articles after the summary section required by Item 503 of covering various capital markets and corporate governance Regulation S-K. Item 105(b) further provides that if the topics, see Market Trends. filing does not contain a summary section, “the risk factor section must immediately follow the cover page Disclosure Requirement of the prospectus or the pricing information section that immediately follows the cover page.” The risk factor disclosure requirement is contained in Item 105 of Regulation S-K (17 C.F.R. § 229.105). It requires, in Form 10-K requires risk factor disclosure in Item 1A of relevant part, companies to disclose: “a discussion of the Part I and Form 10-Q requires risk factor disclosure in Item material factors that make an investment in the registrant 1A of Part II. Both Forms 10-K and 10-Q provide that or offering speculative or risky.” smaller reporting companies are not required to provide risk factors in those forms. Recent Amendments Made • COVID-19 • Brexit in Response to Risk Factor • LIBOR cessation Trends • Cybersecurity The SEC adopted significant changes to the risk factor • China-based issuers disclosure requirements in Item 105 of Regulation S-K that became effective on November 9, 2020. Specifically, the Risk Factor Disclosure Relating to COVID-19 amendments require: Risk The SEC has been closely monitoring how companies • Summary risk factor disclosure of two pages or less if the disclose the effects and risks of COVID-19 on their risk factor section in the filings exceeds 15 pages businesses, financial condition, and results of operations. • Disclosure of material risk factors (Item 105 previously On April 8, 2020, SEC Chairman Clayton and Division required disclosure of the registrant’s “most significant of Corporation Finance Director Hinman published a factors that make an investment in the registrant or statement entitled “The Importance of Disclosure – For offering speculative or risky” (emphasis added)) –and– Investors, Markets and Our Fight Against COVID-19.” This public statement set forth expectations and provided • Organization of risk factors under relevant headings—in guidance for companies entering earnings season in the addition to the subcaptions that the rules already require early days of the global pandemic. Detailed guidance was (Any risk factors that would be generally applicable to also provided in CF Disclosure Guidance Topic No. 9 and any company or any investment of securities must be CF Disclosure Guidance Topic No. 9A. In those publications, disclosed at the end of the risk factor section in the filing the SEC staff emphasized the need for companies to under a separate heading.) “provide disclosures that allow investors to evaluate the The impetus for the changes was based, in part, on trends current and expected impact of COVID-19 through the such as the generic nature and increased length of risk eyes of management and to proactively revise and update factor disclosures in public company filings in recent years. disclosures as facts and circumstances change.” Companies The amendments are intended to encourage more tailored, have disclosed the risks and impact of COVID-19 not only company-specific disclosure. in risk factors related specifically to COVID-19, but have also disclosed COVID-19-related impacts in other risk Despite the amendments, tension may continue to exist factors, including the risks of global economic downturn, between the SEC’s goal of reducing the prevalence of changes in consumer tastes and spending, the ability of lengthy, boilerplate risk factor disclosure and companies’ customers and suppliers to meet their obligations to the decisions to include generic risks to avoid the potential for issuers and third parties, and cybersecurity and data privacy litigation if, in the future, a negative event should occur for risk. Below are several examples of how companies have which a corresponding risk factor was not included. disclosed COVID-19 risk. In the adopting release for the new amendments, the SEC estimated that absent changes made to future filings in Example 1 response to the new requirements, approximately 40% of “The COVID-19 pandemic has affected how we and our current filers would need to provide summary risk factor customers are operating our respective businesses, and the disclosure. duration and extent to which this will impact our future results of operations and our overall financial performance Risk Factor Disclosure remains uncertain. A novel strain of coronavirus (COVID-19) was first Examples identified in late calendar year 2019 and subsequently The disclosure trends covered in this practice note were declared a pandemic by the World Health Organization precipitated by either recent macro-level events affecting in March 2020. The long-term impacts, if any, of the a large number of public companies or the SEC and the global COVID-19 pandemic on our business are currently SEC Division of Corporation Finance staff’s increased unknown. We are conducting business as usual with attention to particular issues affecting a large number of modifications to employee travel, employee work locations, public companies. Below are recent examples of risk factor and cancellation of certain marketing events, among disclosure relating to the following risks: other modifications. We will continue to actively monitor the situation and may take further actions that alter our The Company continues to monitor developments, business operations as may be required by federal, state including government requirements and recommendations or local authorities or that we determine are in the best at the national, state, and local level to evaluate possible interests of our employees, customers, partners, suppliers extensions to all or part of such closures. and stockholders. It is not clear what the potential long- term effects of any such alterations or modifications The temporary closure of our stores, online businesses, may have on our business, including the effects on our distribution centers and offices are expected to have an customers and prospects. adverse impact on our results of operations, financial position and liquidity. For example, although our day-to- We have observed other companies, including customers day operations have been disrupted, we have incurred and and partners, taking precautionary and preemptive actions may continue to incur labor costs during these closures. to address the COVID-19 pandemic. Such companies In addition, after some or all of our stores re-open, any may take further actions that alter their normal business significant reduction in our customers’ willingness to shop operations if there are future spikes of COVID-19 infections our stores, the levels of our customers’ spending at our resulting in additional government mandated shutdowns. stores or our Associates’ willingness to staff our stores and The conditions caused by the COVID-19 pandemic distribution centers, as a result of health concerns related have adversely affected our customers’ willingness to to COVID-19 or its impact on the economy and consumer purchase our products and delayed prospective customers’ discretionary spending may impact our business operations, purchasing decisions. The impacts of the global COVID-19 financial performance and liquidity. The extent of the pandemic on the broader global economy have been swift, impact of COVID-19 on our business is highly uncertain dramatic and unpredictable. The latency and duration and difficult to predict, as information is rapidly evolving of these impacts are diverse across geographies and with respect to the duration and severity of the pandemic jurisdictions in which we market, sell and develop our and the response to contain it.” The TJX Companies, Inc., offerings. The depth and duration of the current economic Annual Report on Form 10-K filed March 27, 2020 (5651 - declines attributable to the COVID-19 pandemic, and any Retail-Family Clothing Stores). potential economic recoveries, are not currently known. In the fourth quarter of fiscal 2020 we experienced revenue Example 3 declines compared to the fourth quarter of fiscal 2019 “Changes in U.S., global, and regional economic conditions and delayed payments from customers. The effect of the are expected to have an adverse effect on the profitability of pandemic for fiscal 2021 and future periods is unknown. our businesses. If we are not able to respond to and manage the impact of the COVID-19 pandemic effectively, our business will A decline in economic activity in the U.S.
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