SEC Issues New Disclosure Guidance and Extends Conditional Filing Relief Amid COVID-19 Pandemic

On March 25, 2020, the SEC’s Division of Corporation Finance published guidance providing its current views on disclosure and other securities law matters that public companies should consider regarding the COVID-19 pandemic and related business and market disruptions. In a separate action, also on March 25, the SEC extended from April 30 to July 1 the time period during which public companies affected by COVID-19 may take advantage of conditional relief from certain filing obligations. This means that calendar year filers will have additional time in which to file their first quarter Form 10-Qs. 

New Division Guidance Relating to COVID-19 Disclosures

New CF Disclosure Guidance: Topic No. 9 addresses a number of disclosure considerations regarding the impact of COVID-19.¹ In general, the SEC’s principles-based disclosure requirements can apply to a broad range of evolving business risks and trends even in the absence of a specific line-item requirement identifying a particular risk. Clearly, given the current and anticipated impact of COVID-19 on the United States and on the global economy, and on the global community, COVID-19 is a material risk for all public companies. Indeed, for many public companies, COVID-19 has already had an impact on results of operations, on financial condition and on liquidity. Therefore, public companies should consider whether and the extent to which disclosure of COVID-19-related risks and effects may be necessary in management’s discussion and analysis (MD&A), the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting and the financial statements.

Assessing and Disclosing the Evolving Impact of COVID-19

• Assessing the risks and effects of COVID-19 is a facts and circumstances analysis, and any related disclosures, including how the company and management are responding to such risks and effects, should be company-specific. The Division has provided a list of questions that companies assessing COVID-19-related effects and evaluating their disclosure obligations should consider with respect to their present and future operations. The list, which is meant to be illustrative and not exhaustive, is set forth below.
  • 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?
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?
  • 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?
  • Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
  • Do you expect COVID-19 to materially affect the demand for your products or services?
  • Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
• The Division encourages disclosure that is tailored to provide material information and enables investors to evaluate the current and expected impact of COVID-19 through the eyes of management, and to proactively revise and update disclosures as facts and circumstances change.
• Because disclosure responsive to the questions above could involve forward-looking information that may be based on assumptions and expectations regarding future events, the Division reminds companies that they may avail themselves of the safe harbors in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act for forward-looking information.

Insider Trading and Regulation FD

• Where a company is affected by COVID-19 in a way that would be material to investors or becomes aware of a COVID-19-related risk that would be material to investors, the company, its directors and officers and other insiders aware of these matters should refrain from trading in the company’s stock until such information has been publicly disclosed.
• When a company discloses material information about the effects of COVID-19, it should take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public.²
  
  This guidance echoes a statement issued by the Co-Directors of the SEC’s Enforcement Division on March 23. Acknowledging the unprecedented impact COVID-19 has had on the securities markets, they reminded corporate insiders of their obligations not to communicate or trade in securities on the basis of material nonpublic information and urged public companies to be vigilant about their disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions.

• Depending on a company’s particular circumstances, a company that has made previous disclosures about COVID-19 should consider the need to revisit, refresh or update any previous disclosure to the extent that information has become materially inaccurate. 

Reporting Earnings and Financial Results

• The Division understands that companies may be considering how to report the evolving impact of COVID-19 in light of unexpected nonrecurring charges and expenses, and recognizes that the impact of COVID-19 on businesses may present novel or complex accounting issues that may take time to resolve. The guidance encourages companies to proactively address financial reporting matters earlier than usual (e.g., if an expert will be needed to evaluate a potential goodwill impairment due to COVID-19, engage the expert promptly so reporting can be as timely as possible).
• The Division reminds companies of their obligations with respect to the presentation of non-GAAP financial measures under Item 10 of Regulation S-K and Regulation G as well as the SEC’s recent guidance on key performance indicators (KPIs) and other metrics in MD&A (as discussed in a previous Sidley Update). To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it should 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.
• In situations where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete, the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that include either provisional amount(s) based on a reasonable estimate or a range of reasonably estimable GAAP results.
  
  Example: Under this position, if a company plans to disclose its EBITDA on an earnings call, it could reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The provisional amount or range should reflect a reasonable estimate of COVID-19-related charges not yet finalized (e.g., impairment charges).

• A non-GAAP financial measure should not be disclosed more prominently (and cannot be disclosed more prominently in filings subject to Item 10(e) of Regulation S-K) than the most directly comparable GAAP financial measure or range of GAAP measures. In filings where GAAP financial statements are required (e.g., Form 10-K or 10-Q), companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.
• If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the Division position discussed above, it should limit the measures in its presentation to the actual non-GAAP financial measures used when reporting financial results to the Board of Directors. The Division reminds companies that they should not present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather, companies should use non-GAAP financial measures and performance metrics to share with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results. If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.
• Companies considering presenting metrics related to COVID-19, or changing the method by which they calculate a metric as a result of COVID-19, should be mindful of the principles explained in the SEC’s recent guidance on metrics.

Additional Guidance

• The Division emphasized that health and safety are the first priority, and should not be compromised to meet reporting requirements.
• As events evolve, the Division will provide additional guidance, if appropriate. Companies and their representatives should contact the Division with questions or if they believe there are additional areas where guidance or temporary relief may be necessary. 

Extension of Conditional Filing Relief for Public Companies Affected by COVID-19

As discussed in a previous Sidley Update, the SEC issued an order³ on March 4 providing conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the COVID-19 pandemic. The order provided an additional 45 days to file Exchange Act reports (e.g., Forms 10-K, 20-F, 10-Q, 8-K, 6-K and proxy statements) due between March 1 and April 30, 2020, subject to specified conditions. The order also exempts companies preparing for their upcoming annual meetings from the requirement to furnish proxy statements and other soliciting materials to stockholders when mail delivery is impossible. 

Acknowledging that the ongoing and evolving effects of COVID-19 continue to make it challenging for some public companies to timely comply with applicable filing requirements, on March 25, the SEC announced the issuance of a new order⁴ that supersedes the original order and extends the period of the exemption to cover filings due on or before July 1, 2020.⁵ The conditions for taking advantage of the relief remain the same, including filing a Form 8-K or Form 6-K by the later of March 16 or the report’s original filing deadline summarizing why the relief is necessary in the company’s particular circumstances. The new order clarifies that a company must file a Form 8-K or Form 6-K for each filing that is delayed. The exemption providing relief from the proxy statement delivery requirements remains in effect.  

The SEC encourages companies and their representatives to contact the SEC staff with questions and concerns. The SEC will continue to monitor developments and may extend the relief period or provide additional relief if deemed appropriate. 

¹Coronavirus (COVID-19), Division of Corporation Finance, Securities and Exchange Commission, CF Disclosure Guidance: Topic No. 9 (March 25, 2020). 
² Although foreign private issuers are not subject to Regulation FD, they are required to make timely disclosures of material information pursuant to self-regulatory organization rules and policies, and their disclosure practices remain subject to liability for conduct that violates the antifraud provisions of the federal securities laws. See Selective Disclosure and Insider Trading, Release No. 33-7881 (August 15, 2000).
³ Order Under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, Release No. 34-88318 (March 4, 2020).  
⁴ Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements For Public Companies, Release No. 34-88465 (March 25, 2020).  
⁵ The SEC also issued orders on March 25 superseding and extending the filing periods specified in orders issued on March 13 that provide investment funds and investment advisers with relief from certain requirements in light of COVID-19.