July 28, 2011

Risk Factors: Consider the Debt Ceiling Standoff

With the debt ceiling deadline approaching, a number of companies are likely considering the need to include risk factor or other disclosures in their Form 8-Ks (when reporting earnings) or Form 10-Qs – or already have done so. For example, EBay included a risk factor in its Form 10-Q filed last Friday. And Centene Corp. included the following risk factor in its Form 10-Q filed Tuesday:

The failure of the federal government to raise the federal debt ceiling could affect funding for Medicaid and our cash flow.

As has been widely reported, the United States Treasury Secretary has stated that the federal government may not be able to meet its debt payments in the relatively near future unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted and the debt ceiling is reached, the federal government may stop or delay making payments on its obligations, including funding for Medicaid. A failure by the federal government to fund or a material delay in the funding for Medicaid could have a material adverse effect on our cash flows.

Whether a company should include this type of disclosure will depend on the potential impact of the debt crisis on its business. Brian Breheny of Skadden notes: “My general sense is that unless the company is in a specific industry that is reliant on government funding, holds a material amount of government securities, or can specifically identify a risk it may experience if the debt ceiling negotiations fail, then general disclosure regarding the debt ceiling negotiations is generic and probably unnecessary.”

More on “SEC Filings: What is the Difference Between a ‘Schedule’ and a ‘Form’?”

In response to my recent musings about the differences between an SEC “form” and “schedule,” Scott Cooper of Rayburn Cooper & Durham responded with this interesting note:

In reading your blog regarding Schedule 13Fs, I recalled that I was involved with that rule-making as a Investment Management Staff attorney under the direction of Lee Spencer. That project was a long time ago and I do not remember any extensive discussion of whether to call it a “form” or “schedule.” One distinction was that IM had responsibility for Section 13(f) while Corp Fin was responsible for the rest of the Williams Act. I believe that all IM reports and registration statements were called forms but I’m not sure about that.

A more important distinction – at least in my memory – is that Form 13F was to be one of the first forms/schedules designed to be filed in a computer format which meant at the time sending in a tape with the data. The idea was the market and the SEC would be able to manipulate the data and that it could be quickly dispensed if it was received on tape in a standard format. My principal mission was to design the standard format working with some of the few technology staff that the SEC had at the time. We also required a paper copy that was quite massive. Public dissemination became controversial as the SEC wanted to have an outside firm do it and there was a perceived economic benefit to having the data first.

In my undergraduate days, I had taken a computer science course and knew a little about programming, since the course work in the early 70’s was to actually prepare punch cards to run programs. You spent a lot of time in the computer lab printing cards and hoping that the result was correct. Not many of my attorney colleagues at the SEC had done so and I always assumed that is why I was asked to assist.

Based upon the Form 13F experience, I transferred to Corp Fin’s Office of Disclosure Policy and worked to develop other Williams Act rules with John Granda and John Huber and then in Integrated Disclosure projects. Thanks for letting me take a trip down memory lane (for at least the parts that I can remember!)

Understanding Corporate Espionage

In this podcast, Carolyn McNiven of DLA Piper – a former federal prosecutor – explains how companies can better protect themselves from corporate espionage, including:

– What are the most common types of corporate espionage?
– What steps can boards take to ensure that management is protecting corporate assets against these acts?
– When does a company have a duty to disclose that something has been stolen from them?

– Broc Romanek