Bryan House, a partner with the law firm of Foley & Lardner LLP, discusses new guidelines issued by the U.S. Securities and Exchange Commission on disclosing supply chain disruptions to investors.

With all of the disruptions affecting global business and trade over the past three years, SEC “is drilling down more on supply chain issues than they ever have in the past,” says House. Now, that concern is taking the form of new guidelines that require public companies not only to report disruptions in their supply chains, but somehow quantify them for investors. The idea is to reveal how various supply chain-related issues are actually affecting the business’s bottom line.

What prompted SEC to take action at this time? “COVID really changes the rules in so many different ways,” says House. During the pandemic, the commission became much more active in giving guidance to businesses on how to handle “unprecedented” disruptions. It further clarified its concerns in the wake of Russia’s invasion of Ukraine. 

There will be penalties for non-compliance, House says. SEC’s Division of Corporation Finance provides guidance as to what it‘s looking for in disclosures. Then the Division of Enforcement steps in to assess penalties in cases of serious failures to report. “The SEC is busy; it’s overworked,” he says, “but there are still investigations that are going to play out. I do expect to see more enforcement actions related to supply chains.”

It won’t be easy for companies with far-flung global operations to comply. “It’s hard to know exactly what’s going on in other parts of the world,” House says. Still, he advises businesses to “have people on the ground,” along with a well-defined process for conveying relevant information from multiple sources to corporate headquarters and a disclosure committee.