Securities Regulation and Corporate Governance

​​​On April 8, 2020, Securities and Exchange Commission (“SEC") Chairman Jay Clayton and Division of Corporation Finance Director Bill Hinman issued a joint statement, available here (the “Statement") stressing the importance of COVID-19 disclosures (particularly forward-looking disclosures), and urging companies to provide as much information as is practicable regarding their current financial and operational status, as well as operational and financial planning. The Statement notes that the COVID-19 pandemic has shifted the global economic landscape and that the SEC recognizes that workers and businesses are facing profound challenges. 

The Statement stresses the importance of using upcoming earnings announcements and quarterly SEC filings to inform investors and the markets on how companies are responding to and mitigating the impacts of COVID-19 on their businesses in order to provide the public with information to both support the future economic recovery and promote informed investment decisions.  As a result, the Statement urges public companies to provide robust and meaningful disclosure, including reports that include forward-looking information.  In particular, the Statement expresses the following views on COVID-19 related disclosure:

• Company disclosure should reflect the current state of affairs and outlook and plans for addressing the effects of COVID-19.  The Statement requests that companies provide as much information as is practicable regarding their current status (operationally and financially) and plans for addressing and mitigating the effects of COVID-19.  In particular, the Statement encourages a detailed discussion of current liquidity positions and expected financial resource needs.  Additionally, companies are urged to disclose how their COVID-19 response plans, including efforts to protect the health and well-being of their workforce and customers, are progressing.  Finally, companies receiving financial assistance under the CARES Act or similar COVID-19 related programs are encouraged to disclose this fact, as well as the nature, amount and effects of such assistance, if material to, or reasonably likely to have a material effect on, their financial condition or results of operations.
• Providing detailed information regarding future company operating conditions, while challenging, is important.  The Statement notes that quarterly earnings reports and related investor and analyst calls will not be routine, observing that for many companies, first quarter results may be less relevant for investors and analysts.  While recognizing that providing detailed information regarding a company's future operating conditions and resource needs can present difficulties (as key drivers of operational status and financial results are apt to undergo material changes), and that response strategies are in their incipient stages (and also likely to change), the Statement emphasizes that these disclosures are important. The Statement further recognizes that such disclosures may well need to be subsequently updated or supplemented, but notes that updating and refining estimates should become less difficult over time.  The Statement also encourages companies and their advisors to make all reasonable efforts to convey meaningful information, like company-specific status, operational strategies and risks, and to resist the temptation to resort to generic or boilerplate disclosures.  
• Increased transparency can foster confidence among investors, market participants and other stakeholders.  The Statement tasks companies to seize rather than shrink from the opportunity to disclose the challenges they face in this unusual economic climate.  The Statement emphasizes that high quality, forward-looking disclosures will benefit investors and companies alike, and will facilitate communication and coordination across our economy—including between the public and private sectors—contributing to the collective fight against COVID-19.  Companies are asked to provide as much forward-looking information as practicable guided by three primary considerations: (i) the information will benefit investors; (ii) market digestion of the information will benefit the company; and (iii) the broad dissemination and exchange of company-specific plans for addressing the effects of COVID-19 under various scenarios will contribute to our nation's collective effort to fight and recover from COVID-19.   
• Companies providing the requested forward-looking disclosures should avail themselves of the safe-harbors for such statements, and the SEC is not expected to second guess good faith reliance on such safe-harbors.  The Statement recognizes that actual financial and operational results may differ substantially from what would now appear to be reasonable estimates, particularly given the current public health crisis.  Nonetheless, the Statement encourages companies to respond to the call for robust forward-looking disclosure, emphasizing that, given the uncertainty in our current business environment, good faith attempts to provide appropriately framed forward-looking information are not expected to be second guessed by the SEC.
  

The Statement highlights the importance of companies plannin​g their quarter-end disclosures carefully and well in advance, and stresses the importance of meaningful public disclosure, particularly in these challenging times, in order to address the escalating and evolving effects of COVID-19 on companies' operations and financial condition.  

Due to the complexity of the current situation and its rapidly changing impact on businesses, companies would be well-advised to allow extra time to draft, vet, and verify forward-looking disclosures that would be appropriate, and that may be required under the SEC's rules, as they prepare discussions of their quarterly results and liquidity.[1]  The preparation of quarterly reports, earnings releases and earnings call scripts and Q&As are likely to be especially challenging this quarter, particularly at a time when there are so many new and additional demands being placed on companies and their boards and management teams.​​

   [1]   A company unable to meet a filing deadline for certain disclosure reports due to circumstances related to COVID-19 should consider the availability of the conditional reporting relief provided by the SEC, as previously discussed in our post here.