Recognizing the struggle businesses currently face and will continue to face in satisfying their disclosure obligations amid the uncertainty surrounding this unprecedented crisis, the SEC’s Division of Corporate Finance on March 25 issued disclosure guidance specific to the coronavirus pandemic.
In its guidance, the Division acknowledges that it “may be difficult to assess or predict with precision, the broad effects of COVID-19 on industries or individual companies” and that “the actual impact will depend on many factors beyond a company’s control and knowledge.” That said, the Division goes on to encourage “timely reporting,” noting that SEC disclosure requirements apply to a “broad range of evolving business risks” that may not be specifically identified, including the “known or reasonably likely effects of and the types of risks presented by COVID-19.” The Division encourages “tailored” disclosure of “material information about the impact of COVID-19 to investors and market participants … that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management,” and proactive revision and update of those disclosures as facts and circumstances change.
The Division identifies in its guidance a non-exhaustive list of specific issues relevant to assessing and disclosing the evolving impact of COVID-19, including:
- The expected impact of COVID-19 “on future operating results and near-and-long-term financial condition.”
- Impact to capital and financial resources and any course of action proposed or taken to address it.
- Impact to assets on balance sheet and ability to timely account for those assets.
- Likely material impacts to financial statements resulting from material impairments, increases in allowances for credit losses, restructuring charges, or changes in accounting judgments.
- Impact of COVID-19 related circumstances such as remote work arrangements on “ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.”
- Challenges in implementing business continuity plans and associated material expenditures.
- Material impacts to product or service demand.
- Material impacts to supply chain and product or service distribution and any resulting impact to cost/revenue relationship.
- Impact to human capital resources and productivity and resulting adverse effects.
- Impact of travel restrictions and border closures.
The Division recognizes that these disclosures will “involve forward-looking information that may be based on assumptions and expectations regarding future events” and reminds companies that they can avail themselves of the “safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act” in making these disclosures.
In addition, the Division reminds companies of the need to refrain from trading prior to the dissemination of material non-public information. The guidance also addresses the release of earnings estimates and other financial results in advance of required financial reporting. The full text of the Division’s guidance can be found here.
Further recognizing the extent to which public companies, investment advisers, and investment funds may be whipsawed between their reporting, disclosure, and other obligations under the securities laws and the uncertainties that pervade the pandemic, on March 25, the SEC also issued orders extending certain deadlines imposed by the Exchange Act, the Investment Company Act, and the Investment Advisers Act. The orders expand on relief provided by the SEC earlier this month.
Subject to certain conditions, public companies may be eligible for 45 additional days to file certain disclosures that otherwise would be due between March 1 and July 1, 2020, including earnings results and annual reports. One condition is that companies seeking to take advantage of the extension must file a report explaining, as to each delayed disclosure, why the delay is necessary.
The other orders issued last Wednesday extend the time for investment funds and advisers to seek exemptions for required in-person board meetings and also extend the deadline for certain forms and reports that had been due before June 30. Investment funds and advisers are not required to tell the SEC why the extensions are needed or when the forms and reports will be filed.
The orders are available here:
- Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies
- Order Under Section 6(c) and Section 38(a) of the Investment Company Act of 1940 Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder; Commission Statement Regarding Prospectus Delivery
- Order Under Section 206A of the Investment Advisers Act of 1940 Granting Exemptions from Specified Provisions of the Investment Advisers Act and Certain Rules Thereunder
If you are facing securities litigation, trying to avoid it, or need any assistance regarding the requirements of the securities laws, we are here to help. Please do not hesitate to contact Sam Portnoy, Director in the Gibbons Commercial & Criminal Litigation Department, with your questions or concerns.
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