SEC grants filing extensions, publishes guidance on providing high-quality information

The SEC has issued an order conditionally exempting public companies unable to meet filing deadlines because of COVID-19 from certain reporting requirements. The order provides affected public companies with 45-day extensions to file their disclosure reports, including Forms 10-K and 10-Q, that would have been due between March 1 and July 1, 2020. The SEC’s press release states: 

Among other conditions, companies must continue to convey through a current report a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed. The Commission may provide extensions to the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.

Companies relying on this order must furnish a Current Report on Form 8-K or, in the case of foreign private issuers, Form 6-K for each filing that will be delayed. These must be furnished by the later of (a) the original filing deadline of the report; and (b) March 16, 2020, and contain the following information: 

(1) A statement that the company is relying on the order; 

(2) A brief description of the reasons why the company could not file such report, schedule, or form on a timely basis; 

(3) The estimated date when the report, schedule, or form is expected to be filed; 

(4) One or more company-specific risk factors explaining the impact, if material, of COVID-19 on the company’s business; and 

(5) If the reason the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report, or certification, the Form 8-K or Form 6-K shall have attached as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report, or certification on or before the date such report must be filed.

The order notes that any registrant relying on the order would not need to file a Notification of Late Filing on Form 12b-25 as long as the report, schedule, or form is filed within the time period prescribed by the order.

Proxy delivery requirements and annual meeting changes 

The SEC order also provides relief for companies with regard to furnishing information and soliciting materials, such as proxy statements, annual reports, and other soliciting materials, to security holders when (a) mail delivery service has been suspended in an area due to COVID-19; and (b) the company making a solicitation has made a good-faith effort to furnish such materials, as required by applicable rules. (“Delivery service” refers to the type or class customarily used by the company making the solicitation.)

In addition, companies may be contemplating changes in the date, time, or location of their annual or special shareholder meetings due to difficulties arising from COVID-19. The SEC staff has announced that if a company has already mailed and filed its definitive proxy materials, then company shareholders can be notified of such changes without mailing additional soliciting materials or amending its proxy materials if the company:

a. Issues a press release announcing the changes; 

b. Files the announcement as definitive additional soliciting material on EDGAR; and 

c. Takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change. 

Further, if a company is contemplating the possibility of conducting a “virtual” shareholder meeting through the internet or other electronic means in lieu of an in-person meeting, then the SEC staff:

Expects the company to notify its shareholders, intermediaries in the proxy process, and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the “virtual” or “hybrid” meeting, including how shareholders can remotely access, participate in, and vote at such meeting. 

Such notification and disclosures should be provided in proxy materials. If proxy materials were mailed prior to a decision to conduct a “virtual” or “hybrid” meeting, then additional soliciting materials need not be mailed solely for the purpose of changing the medium through which such meeting is conducted. In such a case, a company must follow the steps described in a., b., and c. above. 

We recommend that companies consult with legal counsel in regard to these matters.

COVID-19-related financial reporting for SEC registrants

SEC registrants should continue assessing the impact of the COVID-19 pandemic and planned responses, and thoughtfully consider how and where to transparently disclose such information in SEC filings. The SEC has emphasized the importance of providing high-quality financial information needed by stakeholders during this unprecedented and challenging time. The SEC is urging registrants to provide as much transparent information about their operations and financial position as is practicable, with a strong emphasis on forward-looking information. According to the order, the SEC “believes such statements, as furnished, to the extent they contain ‘forward-looking statements,’ and otherwise meet the conditions of Exchange Act Section 21E, would be subject to the safe harbor contained therein. See the Private Securities Litigation Reform Act of 1995, 15 U.S.C. Section 77z-1 (1998).” 

The Chairman and the Director of the Division of Corporation Finance of the SEC issued a Public Statement on April 8, 2020, providing observations and requests intended to facilitate robust disclosure. We have provided a selection of observations we believe are particularly relevant with respect to developing forecasts, drafting disclosure language, and identifying pertinent forward-looking information that should be communicated to stakeholders. However, we encourage registrants to read the full statement. 

Selected observations of the Chairman and Director of Corporate Finance

• Our collective national effort to mitigate the COVID-19 pandemic has caused a deep contraction in vast areas of our economy, with many workers and businesses facing profound challenges. 
• There is broad support for this national, full-mitigation response to COVID-19, but also broad recognition that our strategy must evolve to effectively address the health risks of COVID-19 while fostering a meaningful, responsible increase in economic activity. 
• Executing such a strategy will require constant coordination among workers, consumers, businesses, governmental authorities and investors, both broadly and at the individual and firm-specific level. 
• There now appears to be an emerging consensus that, as we develop more tools to fight COVID-19 – increased testing, enhanced monitoring, data analysis, and identification of effective therapeutics – we can, anchored by advice of healthcare specialists, incrementally foster economic activity.
• Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant. 
• High quality disclosure will not only provide benefits to investors and companies, it also will enhance valuable communication and coordination across our economy – including between the public and private sectors – as together we pursue the fight against COVID-19.
• We encourage companies that respond to our call for forward-looking disclosure to avail themselves of the safe-harbors for such statements and also note that we would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.

Disclosures in SEC filings including forward-looking financial information

Given the pervasive nature of the economic effects of COVID-19, disclosure of COVID-19-related risks and effects, including planned responses thereto, will be appropriate in multiple locations within the SEC filings of most companies. Accordingly, most companies should disclose the impact of COVID-19 in the following sections of Form 10-K and update when/as necessary: Business (Item 1), Risk Factors (Item 1A), Management’s Discussion and Analysis (Item 7), Financial Statements (Item 8), and Controls and Procedures (Item 9A). To aid companies in developing these disclosures, the SEC’s Division of Corporation Finance provided the below illustrative list, which is not intended to be exhaustive, of questions companies should consider when preparing SEC filings. 

• 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?
  • *See the SEC’s release No. 33-9144, “Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis.”
• 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? 

We believe that companies should incorporate the above questions into disclosure-related controls (e.g., disclosure committee activities). Further, much of the above considerations involve forward-looking information “that may be based on assumptions and expectations regarding future events.” Companies providing forward-looking information about material developments in an effort to provide relevant and timely information to investors should avail themselves of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act.

Non-GAAP financial measures

Companies may consider whether the impact of the COVID-19 pandemic should be reflected in non-GAAP financial measures and, to the extent a company elects to do so, 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” (see guidance from the Division of Corporation Finance). When they are presented (e.g., in an earnings press release), SEC Regulations require non-GAAP financial measures to be reconciled to the most directly comparable U.S. GAAP measure with transparent descriptions of related adjustments. Further, a non-GAAP financial measure may not be presented more prominently than its most directly comparable U.S. GAAP measure, cannot be misleading, must be clearly labeled and be accompanied by a description of why management believes the non-GAAP measure is useful to investors, including how management uses it.