Recently, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance issued a sample letter advising companies on their potential need to disclose direct and indirect impact of Russia’s invasion of Ukraine and the related international response on their operations. Sample letters generally do not create any new legal obligations; instead, they signal the areas of potential scrutiny by the SEC and illustrate the types of risks the SEC may view as material. Therefore, while the sample letter on the Ukraine invasion does not create any new disclosure obligations, it indicates that companies should consider the various direct and indirect impacts of the invasion on their operations and supply chains and determine whether any of these impacts are material and thus should be disclosed.
According to the sample letter, to the extent material or otherwise required, companies should provide detailed disclosure related to:
- direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus;
- direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia;
- actual or potential disruptions in the company’s supply chain; or
- business relationships, connections to, or assets in, Russia, Belarus, or Ukraine.
Further, regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure, companies should also disclose any material heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities due to the invasion. With respect to supply chain risks, the comments to the sample letter provide that companies should consider disclosing whether and how their business segments, products, lines of service, projects, or operations are materially impacted by supply chain disruptions, especially in light of Russia’s invasion of Ukraine. This includes discussing whether companies have or expect to:
- suspend the production, purchase, sale, or maintenance of certain items;
- experience higher costs due to constrained capacity or increased commodity prices or challenges sourcing materials (e.g., nickel, palladium, neon, cobalt, iron, platinum or other raw material sourced from Russia, Belarus, or Ukraine);
- experience surges or declines in consumer demand for which companies are unable to adequately adjust supply;
- be unable to supply products at competitive prices or at all due to export restrictions, sanctions, or the ongoing invasion; or
- be exposed to supply chain risk in light of Russia’s invasion of Ukraine and/or related geopolitical tension or have sought, made or announced plans to “de-globalize” their supply chain.
Key Takeaways
Although the sample letter doesn’t create any new disclosure obligations, it is clear that the SEC expects companies to disclose any material impacts of the Ukraine invasion and subsequent response of the international community on their supply chains. Understanding their supplier relationships in Ukraine, Russia, and Belarus, is crucial to the companies’ determination of whether any of these supply chain impacts rise to the level of being “material.” The sample letter underscores the importance of supply chain mapping and risk assessments as companies who have these tools in place are much better positioned to identify new material risks, including those that arose as a result of Ukraine’s invasion.
