The WSJ is reporting that, in a speech to the FEI Current Financial Reporting Issues Conference in New York, SEC Chair Jay Clayton advised the audience that the SEC is "sharpening its focus on corporate disclosures about the risks associated with the U.K.'s exit from the European Union....'My personal view is that the potential impact of Brexit has been understated....I would expect companies to be looking at this closely and sharing their views with the investment community.'" To be sure, in terms of potential disruption, some practitioners have likened the havoc that Brexit could create to the chaos anticipated from the Y2K bug! But even if that analogy turns out to be a bit too apocalyptic, as we approach 10-K season, companies should consider how Brexit could affect their businesses and whether that impact merits disclosure.

As you probably know, the U.K. is still in negotiations regarding its anticipated departure from the EU. However, the WSJ observes, the divorce is currently scheduled to become effective on March 29, and many companies are examining whether they will need to take action in advance, for example, by moving headquarters, factories or other facilities or stocking up on materials and components.

For some companies, one of the most significant issues will be whether they will need to relocate to EU-based banks financial arrangements, such as syndicated loans, swaps and other derivatives, that are currently located at banks in London. That could be a costly, time-consuming and paper-intensive process. As reported in this WSJ article, "regulations that currently cover the City of London, the heart of the U.K.'s and Europe's financial industry, may stop applying as early as March 2019. That could make it necessary to relocate thousands of financial products used by corporates to an EU-based financial entity." Determining if relocation is necessary will depend on the results of the final Brexit negotiations—whether the U.K. and EU were able to agree to a free trade deal that includes financial services and allows the U.K. to function much like it has with its current "passport"; whether the U.K. is instead granted equivalence status by the EU, which "allows non-EU financial firms to offer a limited range of mostly wholesale services—such as securities trading and clearing—to European customers provided their home country's financial regulations are broadly similar to the EU's"; whether the U.K. "becomes a so-called third country after a hard Brexit" with no agreements in place; or whether some other permutation emerges. Apparently, there are thousands of financial contracts with an aggregate value of approximately $2.7 trillion that could be affected. In light of the current uncertainty, companies are also considering if they need to "repaper" their financial contracts (or will be able to make any needed changes only in future agreements) and the potential impact on hedge accounting.

According to the article, Clayton noted that there seems to be a wide spectrum of disclosure about Brexit, even among companies in the same industry: "Company A, for instance, might provide a thoughtful analysis of the potential risks posed by a so-called hard Brexit, in which the U.K. leaves the EU without agreements on trade, finance and other key elements of the divorce. Details could include the effect of Brexit on the company's supply chain or its business prospects. Company B, however, might provide only a general statement that identifies Brexit as business threat on the horizon, Mr. Clayton said. 'I want to see the disclosure, to the extent that it's material and appropriate, gravitate to Company A,' Mr. Clayton said."

Similarly, at the PLI Annual Institute on Securities Regulation last week, Corp Fin representatives likewise emphasized the importance of non-generic Brexit disclosure, if material. Among the issues identified for consideration were supply chain issues, allocation of personnel, the potential need to relocate and franchise renegotiations.

Also mentioned as possible disclosure issues were the impact of the future LIBOR phase-out on legacy financial instruments and hedge accounting and, of course, cybersecurity, including board risk oversight, insider trading and disclosure controls. (See this Cooley Alert.)

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