When we last left disclosure of “Trump risk” just after the November 8 presidential election, only a few brave filers mentioned the victory of Donald Trump in their risk factors. Prompt as they were, those disclosures were predictably vague because nobody knew what a Trump Administration might portend.
Now fourth-quarter 2016 reports are hitting the streets, with many more citing the arrival of Trump and what that might mean for their businesses. Have no fear: the disclosures are still vague.
First, the numbers.
According to Calcbench, nine companies cited Trump as a risk factor in their third-quarter 2016 statements. The first post-election disclosure came from TPI Composites, a manufacturer of components for wind power generation. TPI filed its third-quarter report at 4:41 p.m. on Wednesday, Nov. 9.
As of Wednesday this week, 27 companies mentioned Trump in their risk factors in their fourth quarter reports—and we are only just beginning to see those reports arrive. As more companies file their fourth-quarter reports, that number will climb much higher. (None of this should be confused with the surge in Trump talk on earnings calls, but we’ll leave that headache for the investor relations department.)
Most of the disclosures talk about possible consequences of tax reform or trade policy. Healthcare and pharmaceutical companies mention healthcare reform; energy companies cite possible loss of support for renewable energy or relaxation of environmental rules. Here’s a sampling.
Kansas City Southern, in its Form 10-K filed on Jan. 27, warned about trade policy:
U.S. President Donald J. Trump, certain members of the U.S. House of Representatives, and key U.S. administrative officials and policy makers have suggested renegotiation of NAFTA and the implementation of tariffs, border taxes or other measures that could impact the level of trade between the U.S. and Mexico. Any such proposal or measure could negatively impact KCS customers and the volume of rail shipments, and could have a material adverse effect on KCS’s consolidated financial statements.
Apollo Global Management, in its Form 10-K filed on Feb. 13, cited the risk that tax reform might cause it to lose valuable talent among its investment executives:
Legislation has been proposed in the U.S. Congress to treat portions of incentive income as ordinary income rather than as capital gain for U.S. Federal income tax purposes. Furthermore, President Trump expressed support for such legislation during his electoral campaign as it relates to certain management activities.
Amgen, in its Form 10-K filed on Feb. 14, cited reform to the Affordable Care Act:
U.S. President Donald Trump and other U.S. lawmakers have made statements about potentially repealing and/or replacing the ACA, although specific legislation for such a repeal or replacement has not yet been introduced. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how our products are paid for and reimbursed by government and private payers our business could be adversely impacted.
Lions Gate Entertainment cited tax reform, specifically the prospect that interest expenses might no longer be deductible. Varonis Systems named import-export regulations. CMS Energy said Trump’s opposition to the Clean Power Program could harm future growth. You get the picture.
The Art of Disclosing Not Much
Reams of literature exist to help companies understand what they should disclose as a risk factor. The default, of course, is to be as non-specific as possible, and all the disclosures above certainly fit that spirit.
Two of the more useful pieces of guidance are SEC Financial Reporting Release 36 (originally written in 1989), and Financial Reporting Release 72 (published in 2003). Both are intended more to help filers understand what to disclose in the Management Discussion & Analysis, but the principles at play are just as useful to weigh what you should disclose in your Risk Factors. You may want to give them a fresh read if you haven’t filed your 10-K yet.
The chief obstacle for disclosure of Trump risk is this: Trump hasn’t done much yet. Nor have Republicans in Congress, for that matter. We have no solid plans for tax reform, none for healthcare, none for trade policy, none for infrastructure investment. The only concrete action Trump has tried was his Muslim immigrant ban, which backfired and added even more uncertainty to many companies’ economic plans.
When (if) Trump presents a coherent policy agenda, disclosures might change. The key is that the Trump Administration would need to provide enough of a plan for companies to anticipate how they might change course based on that plan. For example, a company might say something like, “Because of the Trump Administration’s new infrastructure spending program, we expect to increase investment in capital equipment by an additional 5 to 10 percent in the next year.” That’s a good, useful disclosure.
Alas, Trump (and Congress) has done nothing to let companies provide anywhere near that dreamy level of detail. Yes, companies can disclose in the MD&A that they plan to invest more in capital equipment next year, but big deal—many companies would be doing that regardless of Trump.
Those on the downside of Trump risk—healthcare, pharmaceuticals, alternative energy companies—perhaps can disclose more now, albeit as a risk factor rather than an MD&A item. They may not know precise amounts of damage Trump’s supposed policies might cause, but they can articulate that damage is likely. How they might respond to ensure future growth (that is, what they might put in the MD&A) would be speculation, and probably best left unaddressed.
Regardless, your outside counsel will presumably give you the recommended boilerplate. Those third-year associates have to earn their $210,000 salary somehow, after all.
For now, we can close with one other Trump disclosure from Varonis:
It remains unclear what specifically President Trump would or would not do with respect to the initiatives he has raised and what support he would have to implement any such potential changes.
I suspect the whole country feels that way. Moscow too.