The U.S. Securities and Exchange Commission (SEC) extended its previously granted public company regulatory relief and issued staff guidance yesterday regarding disclosure obligations in light of the continued complications associated with the COVID-19 pandemic. The pandemic has had deleterious effects on markets, companies, and individuals tasked with regulatory compliance and corporate governance. This order and guidance is a continuation of SEC Chairman Jay Clayton’s statement from January that the SEC Staff would monitor and provide guidance to issuers and other market participants regarding disclosures related to the effects of COVID-19.
SEC Extension of Conditional Regulatory Relief
The SEC initially announced its conditional regulatory relief on March 5, when it issued an order that provided publicly traded companies (registrants) with an additional 45 days to file disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Yesterday’s SEC order, which can be viewed here, modified the exemptions to cover filings due on or before July 1, 2020.
The order renews the conditions for relief as announced in its March 5 order. Those conditions require companies to submit a Form 8-K or 6-K for each filing that is delayed by the original reporting deadline, which includes these five points of information:
1. that it is relying on this order,
2. a brief description of why it could not timely file,
3. an estimated date of when the company expects to file its report,
4. if appropriate and material, a risk factor explaining the impact of COVID-19 on its business, and
5. if the company’s failure to timely file relates to a person other than the registrant, to attach a statement signed by such person explaining why it cannot furnish the required information.
Registrants must be aware of their original reporting deadline. For a company to be able to rely on the SEC’s order, it must file a Form 8-K or Form 6-K for each delayed filing by the original reporting deadline.
The order provides relief to registrants that are required to furnish periodic public reports, such as annual reports and quarterly reports, as well as proxy statements, soliciting materials, and information statements, provided that two conditions are satisfied: (1) the registrant’s security holder has a mailing address in an area where the common carrier, because of COVID-19, has suspended delivery service of the type that is customarily used by the registrant in making the solicitation, and (2) the registrant made a good faith effort to either furnish the solicitation or information materials in accordance with the applicable rules.
The order also grants relief to any person required to make any filings with respect to a registrant within the scope of the order, provided that (a) such person files with the SEC any report, schedule, or form required to be filed no later than 45 days after the original due date and (b) any report, schedule, or form filed by the applicable extended deadline discloses that such person is relying on the order and states the reasons why it could not file such report, schedule, or form on a timely basis.
Companies that receive an extension on filing reports under the order will have a new due date 45 days after the filing deadline. As such, those companies will be permitted to rely on Rule 12b-25, if they are unable to file the required reports on or before the extended due date.
SEC Staff Guidance Regarding Disclosures with Respect to COVID-19
The SEC also issued staff guidance regarding disclosure obligations that market actors should consider with respect to the effects of the COVID-19 on businesses and markets. The SEC’s Division of Corporation Finance (CF) issued Disclosure Guidance Topic number 9, which proposes that companies should consider the need for COVID-19-related disclosures; recommending an extra sensitivity to market activities prior to dissemination of material non-public information and reminding issuers of their obligations regarding the presentation of non-GAAP financial measures. This guidance comes on the heels of recent media reports of stock sales by the CEO of the owner of the New York Stock Exchange, his U.S. senator wife, and other members of Congress.
Insiders should not trade in company stock unless they have first confirmed that all material developments concerning their company have been disclosed. To the extent the registrant or insiders are engaged in transactions, or circumstances otherwise warrant it, the registrant should consider what disclosures are required in order to inform the public of its financial condition.
To assist companies in determining the content of their COVID-19-related disclosures, CF offered an illustrative list of questions as a basis for a facts-and-circumstances analysis of an entity’s present and future operations. Some of those questions are:
- How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
- Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
- Have COVID-19-related circumstances, such as remote work arrangements, adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
While these questions may address situations involving forward-looking information based on assumptions and expectations, CF’s guidance reminds reporting companies that they can avail themselves of the safe harbor provisions in Section 27A of the Securities Act and Section 21E of the Exchange Act.
Additionally, CF’s guidance is intended to encourage companies to address financial reporting issues earlier than usual due to COVID-19, likely requiring unexpected nonrecurring charges and expenses by firms. This encouragement includes the suggestion for a company’s auditors to engage with experts to determine how the evolving pandemic may impact a company’s assets.The guidance also includes a reminder to companies about its obligations under Item 10 of Regulation S-K and Regulation G regarding the presentation of non-GAAP financial measures, and of the SEC’s recent guidance regarding performance metrics disclosure, seen here. For example, if a company presents a non-GAAP financial measure or performance metric to explain the impact of COVID-19, the guidance recommends that the company highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. CF’s guidance also encourages companies to proactively revise and update disclosures as facts and circumstances change.
The SEC states that it will continue to closely monitor the situation.
Schiff Hardin’s Coronavirus Task Force will continue to address the significant business, legal, and economic challenges that accompany the COVID-19 pandemic. Stay tuned for additional insights on ongoing COVID-19 pandemic challenges and issues facing businesses.