A New Corporate Compliance Challenge: “No-deal” Brexit Disclosures

A New Corporate Compliance Challenge: “No-deal” Brexit Disclosures

Brexit is predictably creating headaches in Britain as the nation continues its vexing march out of the European Union. Lawmakers in the UK have roundly rejected May’s negotiated exit plans on three previous occasions and, this week, EU leaders granted British Prime Minister Theresa May another extension (until October 31) to negotiate a deal dictating the United Kingdom’s withdrawal from the political and economic union.

Without an extension, a “no deal” Brexit would have taken effect at the end of this week, leaving a host of unresolved technical issues related to the withdrawal. But perhaps this is just a case of delaying the inevitable. Even though policymakers are now getting more time to work on a deal, the series of misfires since UK voters approved Brexit cast doubt on their ability to come to a workable agreement.

The reverberations from the haggling over Brexit terms extend beyond the halls of Parliament, though. It is turning into a corporate compliance issue as a growing number of publicly traded companies are citing the potential of a no-deal Brexit as a risk to their businesses in their reporting disclosures.

In fact, the director of the Securities and Exchange Commission’s Division of Corporation Finance, William Hinman, last month urged registered companies that may be affected by Brexit to give careful consideration to how they would discuss its impact in their filings. He cautioned that “generic disclosure” offers little benefit to investors and should be considered insufficient. “Rather, investors are better served by understanding the lens through which each company’s management looks at its exposure,” Hinman said in speech delivered in London at the 18th Annual Institute on Securities Regulation in Europe.

A survey of recent corporate filings finds that Brexit is showing up in different contexts in their disclosures.

For example, financial services company Jefferies Financial Group noted in its latest quarterly report that it had created a subsidiary of its U.K. broker-dealer in Germany. Jefferies said the newly established entity would enable the company to continue doing business in Europe without disruption once the eventual Brexit plan goes into effect.

Connecticut-based financial data and software company FactSet Research Systems discussed the effects of market volatility created by Brexit. FactSet pointed out that the inability to reach an agreement has slowed down the British economy, but the company offered little more in the way of analysis besides the acknowledgment that the outcome of the negotiations could put a damper on its performance.

In its annual report released this month, TJX Companies included a high-level overview of the discount apparel retailer’s Brexit contingency plan and related issues. For instance, TJX explained that the flow of merchandise between the UK and EU could be affected. Additionally, the retailer said Brexit could hurt the flexibility of its workforce. Perhaps most important, TJX revealed it has a plan in place to reconfigure its supply chain in Europe; moreover, it has already taken steps to put the plan into effect.

In adapting to the new world order of Brexit, these companies are living proof that such grand gestures generally come with hidden costs such as market uncertainty and greater compliance burdens. Those in the UK who supported leaving the EU may eventually look back at the decision and question if it was worth that price.

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