Joel Goodson, the eager and unconventionally entrepreneurial in-house counsel at Lana Co., is on the line with a problem. No, it’s not his missing Steuben crystal egg — instead, he’s asking about the level of detail required for the risk factors in Lana’s upcoming 10-Q.

Most of the risks relating to Lana’s business have not changed since its last 10-K, although Joel notes that the company recently received a claim alleging that one of Lana’s primary services is causing major health problems. Although your client has mentioned the general risk of litigation in its 10-K risk factors, the disclosure did not mention the risk of claims relating to this particular service that Lana provides.

One thing is clear. You cannot tell Joel, “Sometimes you have to say ‘What the heck!’ Take some chances.”

Joel believes a new risk factor is probably warranted and wants to know whether the 10-Q should include the entirety of the amended and restated 10-K risk factors or a more limited update highlighting only the specific change that has arisen since the 10-K filing.

Updating for material changes only

As a technical matter, there is strong support for updating only for material changes. Item 1A of Part II of Form 10-Q requires “any material changes from risk factors as previously disclosed in the registrant's Form 10-K.” This is consistent with the general desire to avoid inundating investors with repetitive disclosure — in this case, the same risk factors previously disclosed in the 10-K. After all, companies should “eliminate immaterial information that does not promote understanding of companies’ financial condition, liquidity and capital resources, changes in financial condition and results of operations.” See Release No. 33-8350 (Dec. 29, 2003), at I.B.

Repeating the 10-K risk factors

Many, if not most, public companies update the risk factors in 10-Q filings only for material changes, although a significant number of companies sometimes choose to include in each 10-Q the entirety of the 10-K risk factors, amending and restating the 10-K risk factors as necessary. Some practitioners believe this has the advantage of avoiding undue prominence to a newly identified or revised risk factor where it could be misleading to highlight one particular risk in a conspicuous way. Depending on the facts, the SEC Staff could issue a comment where a 10-Q uses the long-form approach, but that would likely take the form of a futures comment — i.e., a request by the Staff that, in future 10-Q filings, the company should avoid complete repetition of all of the risk factors included in the 10-K.