Most companies do a good job of reviewing and updating their Form 10-K risk factors once a year. It’s relatively easy to re-read last year’s risk factors, determine what has changed in the interim and make appropriate revisions. Many companies pay much less attention, however, to quarterly risk factor updating.
Form 10-Q expressly requires that companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K.” Despite this mandate, it is relatively rare for a company to provide new risk factor information in a quarterly filing. It seems implausible, however, that a company’s risk factors would conveniently change only each February when its Form 10-K is being reviewed while remaining static the rest of the year.
Three things seem to factor against giving quarterly updating the attention it deserves:
The disclosure is buried back in Part II of Form 10-Q along with several items that seem less significant or usually don’t apply (for example, defaults upon senior securities and mine safety disclosures).
Form 10-Q preparation and filing is on a tight schedule for most companies, particularly large accelerated and accelerated filers, meaning that there is not much time for big picture analysis and original drafting.
Companies may fear that quarterly risk factors (new or updated) attract disproportionate attention. (There is no compelling reason to believe that such disclosure would be more conspicuous or more alarming than any other Form 10-Q updating, such as MD&A or litigation updating.)
In addition, there is a misconception that the Form 10-Q need only disclose new risk factors that have arisen since the Form 10-K was filed. Note that the rule instead requires disclosure of material changes from what was previously disclosed. For example, if the magnitude or nature of a company’s leverage risk, cyber risk or capital expenditure needs has changed materially from what was previously disclosed, the description of that risk may need to be updated in a Form 10-Q.
As a final thought, the safe harbor for forward-looking statements (FLSs) in the Form 10-Q requires that the FLS be “accompanied” by meaningful cautionary language. This is accomplished in part through risk factor disclosure. To the extent that a company’s risk factors are not current, it calls into question whether related FLSs in the company’s Form 10-Q are protected by the safe harbor.
The takeaway is to allow time each quarter for meaningful consideration of your risk factors. Although most of the time no update will be necessary, be sure not to overlook the other times when it is.