Relying on Last Year’s Risk Factors is Risky

The SEC routinely advises companies drafting risk factors to start from a blank sheet of paper and avoid boilerplate.  As with many best practices, this recommendation is often aspirational.

Most companies do, however, take care in reviewing last year’s risk factors to make any necessary updates and additions.  As public companies prepare their annual reports on Form 10-K for fiscal 2016, they should consider the blank sheet of paper and think carefully about how their business risks are likely to change in 2017 as a result of the new political environment.

With both the White House and Congress under Republican control, we will undoubtedly see significant changes in the regulatory landscape.  Public companies must anticipate how changes in laws and regulations might affect both the top and bottom lines.  Mindful that the Democrats lost a similarly strong position only two years after the 2008 election, Republicans are likely to seek to move rapidly to implement their agenda.

Companies that source products or components from abroad, for example, must consider the impact on their cost structure of the import tariffs threatened by the President or the border-adjusted tax proposed by House Republicans.  Companies with overseas sales should assess the risk of possible retaliatory actions by trading partners that will impact revenue from abroad.

Significant changes to the nation’s healthcare system also seem certain, but employers are struggling to understand what those changes might be and how they will affect their employees.

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