Brexit-Related SEC Disclosure Trends

Four months after the United Kingdom voted to exit the European Union, the scope and timing of Brexit remain unclear. Until such details are determined, there will be economic and political uncertainty in the UK and EU, which could impact the wider global economy. As companies ascertain Brexit’s potential effect, some have begun including Brexit-related disclosure in their US Securities and Exchange Commission filings. In the two-month period following the referendum, approximately 400 SEC-registered public companies disclosed Brexit-related ‘Risk Factors’ in quarterly reports and at least 35 disclosed them in SEC registration statements. The number of companies including Brexit-related disclosure highlights the concern about Brexit’s consequences.

Risk Factors in SEC Filings

The SEC requires reporting companies to include a Risk Factors section in annual reports, to describe significant risks for investors. ‘Domestic’ US companies must update Risk Factors in quarterly reports for material changes, and companies registering securities offerings must include them in their prospectuses. In all such filings, companies must disclose risks specific to their company or industry.

Common Brexit Risk Factors

Based on our review of SEC filings, we have identified the following frequently disclosed Brexit-related risks.

Exchange Rate. The post-Brexit fall in the pound sterling and strengthening of the dollar could significantly impact UK companies or those conducting significant business with the UK.

Economic Environment. Following the referendum, economists warned of a substantial risk of an impending recession. For companies in or with significant exposure to the UK, the prospect of a slowdown could represent a substantial risk.

Legal and Regulatory Uncertainty. Companies exposed to the UK may face significant regulatory changes. Those operating in heavily regulated industries or relying on UK intellectual property should consider disclosing the effect such changes may have.

Political Uncertainty. As the UK moves toward officially commencing the withdrawal process, there likely will be further political uncertainty, in the UK and EU.

Other Potential Risks. Companies should consider specific Brexit-related risks when drafting disclosure, eg, financial services firms should consider the effect of losing passporting rights.

Companies should consider the following guidelines regarding Brexit-related disclosure:

• continuously evaluating exposure to the UK and EU markets, and to currency movements relative to the pound sterling and euro;
• monitoring SEC guidance on Brexit disclosure;
• monitoring the economic-political consequences of the referendum;
• periodically reviewing, amending and updating risk factors;
• reviewing disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations for Brexit’s impact on the company’s liability and sources of capital;
• ensuring a clear link between Brexit and discussion of its effects on operating or financial performance;
• ensuring that forward-looking disclosure harmonizes with discussion of Brexit-related risks and other forward-looking Brexit disclosure; and
• tailoring disclosed risks to those particular to the company and industry.

This post comes to us from Skadden, Arps, Slate, Meagher & Flom. It has been co-authored by Michal Berkner, Brian V. Breheny and James A. McDonald.